Thursday, February 1, 2001

One of the most critically important positions in the entire federal government is that of assistant secretary for tax policy at the Treasury Department. Only slightly less important is the No. 2 position, deputy assistant secretary for tax analysis. Together, the people in these positions can revolutionize tax policy in this country if they make a concerted effort to do so.

The Treasury Department plays a unique role in the development of tax policy in the United States. Although it shares, with Congress’ Joint Committee on Taxation, overall responsibility for tax policy, Treasury’s position is pre-eminent. This is due mainly to the fact that Treasury has been principally in charge of tax policy for more that 200 years, while the JCT has been around for less than 80 years. But it also has to do with Treasury’s vastly greater resources. Treasury has far more staff, not even counting those at the Internal Revenue Service, than the JCT and has the capacity to delve more deeply into technical aspects of tax policy than any other organization inside or outside of government.

The assistant secretary for tax policy sits atop this pyramid, with far more power than most Cabinet secretaries. Not only does this person control the administration’s tax legislative process, he also oversees the issuance of tax regulations. These “interpretations” of laws passed by Congress are often more important than the laws themselves, because they govern how the IRS actually administers the tax code.

The deputy assistant secretary for tax analysis is only slightly less important. The person in this position oversees the staff of economists who calculate the impact of tax legislation, produce distribution tables, estimate federal revenues for the president’s budget, and conduct long-term studies on issues such as depreciation, the alternative minimum tax and earned income tax credit.

Studies by OTA economists often appear in professional journals and are also published as working papers on the Treasury Department’s web site ( These studies often represent benchmarks upon which all subsequent analyses are based. Part of the reason simply is that Treasury’s Office of Tax Analysis represents the largest single body of tax economists anywhere, many with more than a decade of research into arcane areas of tax policy. Equally important is the fact that Treasury economists have access to tax data from IRS returns that no one outside of government has access to.

Access to data is critically important because many of the most interesting questions in tax policy involve a very small number of individuals or corporations. Tax data available to the public must necessarily be edited severely to avoid releasing information about specific individuals and companies, and violating their privacy. But data on specific individuals and companies may be necessary to properly analyze how the tax law is used, or perhaps misused, in ways that may have a substantial impact on federal revenues and the economy as a whole.

A single person, in the position of assistant secretary for tax policy, can have an impact on tax policy that lives on literally forever. The best example is Stanley Surrey, who took the position at the beginning of the Kennedy administration and served all the way through the end of the Johnson administration. Surrey, a longtime professor at Harvard, left an indelible impact on tax policy that survives to the present day. And much of that impact is due to his willingness to put in far more time in his position than anyone else who has ever held it.

Normally, the person serving as assistant secretary for tax policy is a lawyer from a big law firm. They take the job for a year or two to burnish their credentials and then move on to multimillion dollar jobs as tax gurus to the rich and powerful. Consequently, they seldom leave any meaningful impact on tax policy. Surrey was the exception. Not only had he principally been an academic, rather than a tax practitioner, but he was an ideologue. He had very definite views about tax policy that he had written about in law reviews for decades before joining the Kennedy administration.

Surrey fought hard to eliminate special provisions of the tax code that he labeled “tax expenditures.” These are tax provisions that substantively are no different from direct spending, except that they save taxes for people rather than giving them a government check. He felt that by calling attention to the cost of these provisions, it would increase pressure on Congress to eliminate them. Surrey spent his entire time at Treasury trying to get an official list of tax expenditures published, and only succeeded in the last few weeks of the Johnson administration.

Since then, tax expenditures have become ubiquitous in tax policy, with an annual list published in the president’s budget and also by the JCT. The concept of tax expenditures has become central to almost all tax analyses, because provisions on the list are automatically assumed to be illegitimate or alien to a proper tax system. Hence, revenue raisers often turn first to the tax expenditures budget when looking for ways to increase taxes.

The point is that there are many equally important reforms that need to be made in terms of analyzing tax policy. For example, many economists believe that the Treasury and JCT should incorporate macroeconomic effects of tax changes in their revenue estimates. Such a reform would be controversial, however, and may require that someone make the same commitment that Surrey made of serving 8 years in the same position at Treasury to make it happen.

Press reports indicate that Mark Weinberger, a tax lawyer at Ernst and Young, is in line to be assistant secretary for tax policy. He is a good man for the job, but as a non-academic it may be unrealistic to expect him to stay in the position for more than the usual two years. However, it ought to be possible to find a top economist willing to serve at least four years in the deputy slot, who will work ceaselessly to get dynamic scoring implemented. Treasury Secretary Paul O’Neill should make every effort to find such a person.

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