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The Trouble With Tax Reform

Max Baucus and Chuck Grassley at the Senate Finance Committee are holding hearings on tax reform, and there’s a lot of interesting material you can read here from the witnesses.

But there’s a big semi-conceptual issue with tax reform, which is quite similar to the trouble with fiscal stimulus. The issue is that for any plausible level of revenue, it would be easy to devise a tax code that raises that revenue, but does so in a more efficient way than our current tax code. That’s because our current tax code is very inefficient. It has relatively high individual and (especially) corporate income tax rates, but also provides tons of loopholes and deductions. The combination of the two creates a lot of distortions — money and effort flowing into activities rewarded by the tax code — and slowly but surely undermine growth over the years.

The challenge of tax reform is conventionally described in terms of diffuse benefits and concentrated interests. And it’s true, of course, that every bad idea in the tax code has its beneficiaries. And the worse the idea, the more tenaciously the beneficiaries will fight for it. But all of politics is more-or-less like that. The deeper problem with tax reform is that you need some kind of consensus about how much money you’re trying to raise. Absent such a consensus, we’re basically doomed to an inefficient tax code. What’s really needed, I think, is not so much reform of the tax code as some kind of meta-reform of the process that would separate votes on tax code structure from votes on overall revenue targets.

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