Kill the Tax Code? Great Sport, Risky Business

William G. Gale
William G. Gale The Arjay and Frances Fearing Miller Chair in Federal Economic Policy, Senior Fellow - Economic Studies, Co-Director - Urban-Brookings Tax Policy Center

April 13, 1998

Everyone has something they just can’t stand, that they wish would just disappear. For many people, that “something” is the income tax. As the April 15 filing deadline approaches, many households trying to figure out their tax forms may be ready to try almost anything instead of the current system.

Perhaps with these people in mind, Rep. Steve Largent (R) of Oklahoma and Sen. Tim Hutchinson (R) of Arkansas have introduced legislation to eliminate federal personal, corporate, estate, and excise taxes by Dec. 31, 2001. More than a third of House and Senate members are co-sponsors. House Speaker Newt Gingrich (R) of Georgia and Senate majority leader Trent Lott (R) of Mississippi have also signed pledges to “kill the [tax] code.”

While everyone agrees that taxes need repair, these proposals are vacuous and risky gimmicks.

The bills are lacking in one crucial regard: What would replace the current system? The proposals stipulate that the new system be simple and fair, not tax saving and investment, end the bias against marriage and family, and be “thoughtfully and deliberately determined by the Congress, the president, and the American people.” These guidelines are vacuous because fairness will always be in the “eyes of the beholder” and the income tax already subsidizes families. And all major reform proposals tax resources that are saved at least once – either when the money is earned or consumed.

If the legislation actually passed, the government would be faced with the task of replacing, in a few short years, taxes that in 1997 raised $1.02 trillion, or 12.6 percent of GDP. This would create a tremendous amount of uncertainty. Could Congress and the administration reach agreement on a new system by the required date? Would the new system raise enough revenue? What features would the new system contain?

The economic effects of such uncertainty could be crippling. Investors who lacked confidence in the ability of Congress and the administration to reach an agreement that raised sufficient revenues would bid up interest rates, fearing increased future budget deficits. Higher interest rates would hurt investment and, because the government pays net interest, raise the deficit as well.

With the structure of future taxes in doubt, investors buying bonds or stocks, families buying homes or saving for retirement, entrepreneurs starting new businesses, and many others would face dramatic uncertainty about the tax consequences of their choices. It’s also possible no agreement would be reached by the start of 2002, after the old system ends, which would wreak havoc on the economy.

Another problem is the torrent of lobbying that would ensue if, in effect, every single provision of the tax code were up for grabs. Lobbyists would be acutely aware that groups that did not vigorously defend their current tax preferences would undoubtedly lose them, as the allocation of scarce subsidy dollars went to those that made the strongest case. Under these circumstances, campaign contributions would probably rise dramatically – a thought not likely lost on the bill’s sponsors.

The proposal projects the image that broad-based tax reform is simple and easy. While there’s general agreement on the goals of tax reform – fairness, simplicity, growth, stability – there is little agreement on the best way to achieve them, or on how to trade them off against each other.

Unfortunately (economics has not been called the dismal science for nothing) trading off some of the principles against others is exactly what any serious reform would require. But isn’t that what we elected Congress for? If we can eliminate the deficit without a balanced-budget amendment, we should be able to enact meaningful tax reform without gimmicks.

An old proverb notes that we should be careful what we wish for, because it may come true. While abolishing the tax code might make good sport, it would create serious and unnecessary risks and would provide no assurance that a new system would be any better. A better strategy would start by simplifying the income tax, by closing loopholes, removing hidden taxes, and reducing tax rates.