Politics

What Would a Fair U.S. Tax Code Look Like?

| by Institute for Policy Innovation

 

By IPI President Tom Giovanetti
 
It seems that everyone these days wants to use the tax code to manipulate someone else’s behavior.

President Obama wants to slap an additional tax on American corporations that “move jobs overseas,” even though already high taxes on corporations helps drive them overseas in the first place. And Mrs. Obama wants to slap new taxes on sodas and sugared drinks in an effort to reduce childhood obesity.

But it’s not just Democrats who succumb to the temptation to shape society through the tax code. Right-leaning economists have embraced much higher gasoline taxes in order to drive conservation, even though price theory argues that energy is already being priced accurately.
 
Presidential candidate Rick Santorum has championed a zero tax rate on manufacturing in order to help stimulate domestic manufacturing (after which almost every producer in the nation would find a way to reclassify as a form of manufacturing). And many on the right think child-rearing should be encouraged and partially subsidized through the tax code.

This is nothing new.
 
We already do a lot of manipulation through the tax code. We—or at least the tax writers in Washington—have decided that things like home ownership and having children is something to encourage, so both get favorable treatment in the tax code. And we try to micromanage the mix of economic production with exemptions here and credits there, short-term depreciation for this but long-term depreciation for that.

The more detailed we get at trying to manipulate behavior and micromanage the economy through the tax code, the more gaps and loopholes we create. In fact, it’s this drive to manipulate and micromanage that drives the tax code toward such incomprehensible complication. Taxpayers are legitimately cynical about the resultant tax code, because they suspect that people who are earning and living very much like themselves are almost certainly getting a better break from the tax code because of some loophole.

At some point we should ask ourselves “What is the purpose of the tax code?” Is it to drive social outcomes and to try to shape society according to the vision and preferences of whoever happens to control the tax writing committees at any given time? Seriously? In a supposedly free society?

Rather, shouldn’t the purpose of the tax code be to raise the necessary revenue to fund government while creating as few economic distortions as possible? If you were going to write a tax code for a free society, wouldn’t you foreswear using the tax code to manipulate people’s behavior, and choose instead to have everyone subject to similar low rates, and eliminate virtually all credits, deductions, exemptions and schedules in the process?

So would I.