May 29, 2007

How to Deal with Corporate Welfare in the Tax Code?

Writing for the New Republic's blog, Bradford Plummer points out that the Cato Institute has published a new report calling on Congress to establish a commission to choose corporate welfare programs to eliminate -- but leaving tax subsidies off the table. The report's author, Stephen Slivinki, envisions a commission like the Base Realignment and Closure Commission (BRAC) which was established by Congress to create a list of military bases for closure to be voted up or down without amendment in each chamber.

Which sounds reasonable enough, but why leave out tax subsidies? Giving a tax break to a corporation that reduces federal revenue by a billion dollars has the same effect as giving a direct subsidy of a billion dollars to the corporation. The report says tax subsidies are not included "because they do not require an actual net expenditure of money from the government," which is not an explanation at all.

Slivinski does make the point that tax subsidies for corporations could be dealt with in a comprehensive tax reform bill. There's just one problem with this idea. Whenever conservatives or libertarians utter the words "tax reform" or "tax simplification" they almost always mean something that cannot rationally be called reform or simplification. As Slivinski explains, one way of doing it would be "to replace the current tax system with a consumption-based tax, such as a flat tax or a national sales tax, that doesn't make distinctions between politically favored taxpayers and others."

First consider the flat tax, which would apply the same tax rate to everyone, meaning higher rates for the poor and lower rates for the rich, or just a massive reduction in government revenue. But none of the complexity and confusion people face during tax season comes from the progressive rates that would be flattened under these plans. Under the current system, once taxable income is calculated, most of us can just go to the tax tables that tell us exactly what our tax liability is for the year. Flat tax schemes really just suck the progressivity out of the tax code, and many versions even allow income from wealth (capital gains and dividends) to go tax-free so that the wealthiest can pay very little in taxes.

Or consider the idea of a "national sales tax." Sales taxes are inherently more regressive because poor people spend most of their money on consumption since there's not much left for savings and investment after they pay for the basics, like food, shelter, medical expenses and clothes. A CTJ analysis found that if Congress really wanted switch to a national sales tax that would bring in the same amount of revenue as our current system, the sales tax would have to be as high as 45 to 53 percent. Good luck to the Senator who wants to explain that on CSPAN.

These are the types of alternatives we hear being touted in any context in which "tax reform" is discussed. Which is unfortunate, because we could use some real tax reform. Real simplification could mean taxing different forms of income equally (whereas now income from investments, which mainly the wealthy have, are taxed at lower rates than income from work). It could mean eliminating or limiting some of the most regressive tax expenditures for businesses and individuals. Senator Ron Wyden has such a plan, and it's a pretty good one.

But what progressive in his right mind wants to call for tax reform when the debate could be hijacked by proponents of some crazy scheme to shift taxes towards the poor and middle-class? And let's face it, as long as you-know-who is still in the White House, it's hard to imagine any honest, good tax reform becoming law.

This problem comes up in many contexts. For example, another advocate of libertarian principles from Cato, Chris Edwards, testified before the Senate subcommittee that is considering tax subsidies for alternative energy. His written testimony argues that creating narrow favors for certain businesses and activities in the tax code leads to complexity and economic inefficiency. Which might be true, at least in the context of energy policy. (CTJ has criticized several tax subsidies for large oil and gas companies, for example). At certain times, Edwards seems reasonable. He quotes Dick Gephardt (hardly an off-the-wall libertarian) saying during the tax reform debates of the 1980s,

The main argument for tax reform, I believe, is to achieve greater efficiency in the way the tax code works. When Congress gets into the business of figuring out $370 billion of tax breaks a year, the House Ways and Means Committee and the Senate Finance Committee really are put in the business of trying, at least partially, to plan the American economy. . . . I confess that I am not qualified to act as a central planner and I do not know anybody on either committee who is.

This sounds pretty reasonable. But then Edwards can't help himself from concluding that the real answer is a consumption tax. "A consumption tax would limit current consumption, including energy consumption, while removing tax barriers to investment—including investment in energy production, energy technologies, and energy conservation." Once again, what might sound at first like a reasonable case for keeping the tax code simple and efficient becomes a call for a massive shift towards a tax system that either soaks the poor, cuts government down into something unrecognizable or both.

There will come a time for tax reform -- that is, real tax reform. Until then, people need to know that a lot of the schemes being touted as "tax simplification" are pure snake oil.


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