The subtitle of this book may be “what every American needs to know,” but a better one would be “the person who writes the check is not necessarily the person who bears the burden of the tax, you idiots.” While it’s a message that might seem straight out of Econ 101, in my experience it also happens to be something that most students quickly forget and that politicians feel free to ignore. Disregarding this simple tenant is commonplace among those content with the status quo who reject any radical changes. And radical change is precisely what the tax code deserves, for it is a complete and utter mess: many find it difficult to comply with; it incentivizes dubious actions and discourages other, salutary ones; and it has become an impediment to the type of economic growth the United States needs if it is ever to dig itself out of its current fiscal hole.
Simplify | Tax reform involves two separate maneuvers, both of which are politically precarious. The first is the reduction or elimination of various deductions, credits, and exemptions that litter the code. The second involves using those savings to reduce tax rates, reduce the deficit, or (if you are the current president) increase spending elsewhere. Both maneuvers promise to be contentious, but it is simplification that portends the most difficulty. This is where Taxes in America is most helpful. Most deductions end up being economically useless to most Americans, but those deductions convey significant benefits on a relatively small group of “winners”—winners who will fight fiercely to keep the benefits. It is a fight that cuts across party lines, and Burman and Slemrod manage to destroy the various shibboleths that special interests construct to defend their sacred cows.
They deftly tear down the tax deductions for mortgage interest, employer-provided health insurance, and state and local taxes, which are the three costliest deductions and ones that prominent politicians on both sides explicitly defend while saying out of the other corner of their mouths that they are in favor of tax reform. It’s rhetoric akin to agreeing to a strict diet as long as pizza and cake are what’s for dinner. Proper tax reform entails everyone’s ox (or special tax break) getting gored, but with the ancillary benefit of more economic growth and more jobs—and ultimately more revenue.
The authors are very good at explaining the origins and attendant complexities of the alternative minimum tax and give a great explanation of the marriage penalty in light of the mathematical difficulty of avoiding penalizing either single or married workers. It provides a great perspective for how the tax code grew to be so complicated in the first place and it describes the obstacles that stand in the way of giving everyone a post card–sized tax return to file.
Reallocation | When it comes to distributing the gains (the aforementioned second part of tax reform), the authors are a bit more circumspect. There’s no one right answer, especially in an economy running trillion-dollar deficits with fierce demographic pressures knocking on the door. But Burman and Slemrod do provide some sage wisdom for those pondering the exercise.
To wit, two competing sentiments among the advocates for tax reform split along conventional political sensibilities: the desire to rearrange the tax code so that it is more conducive to economic growth, and the desire to change the code so it does more to redistribute wealth across the income brackets. Despite the fervent wishes and banal arguments to the contrary, these two generally work in the opposite direction. If we follow the economists Thomas Pikkety and Emmanuel Saez and tax the income of the wealthy at a 70 percent rate, there will be a reduction in economic growth; the question is only how much of a reduction.
Liberals love to use the utterings of a few extremists on the right who aver that all tax cuts pay for themselves as proof positive that supply-side economics is the realm of the loony. But holding that people and businesses are largely unresponsive to tax rates (as a recent publication by the Congressional Research Service suggested) is a willful ignorance as wrong as that of the most extreme supply-siders. While tax cuts can rarely be said to “pay for themselves,” the fact remains that sustained, solid economic growth is a necessary ingredient in any attempt to boost revenue. The two largest revenue gains in post-war history occurred from 1996 to 2000, when federal revenue went up by 50 percent, and then from 2004 to 2007, when it increased by over one-third. In neither period was tax rates increased. Both spans represent periods of strong and sustained economic growth.
A mathematical truism is that the difference between 2 percent and 3 percent economic growth is not just 1 percentage point—it’s 50 percent. In the long run that difference can have a huge impact on standards of living and tax revenue, as anyone familiar with the miracles of compound interest can attest.
Burman and Slemrod demonstrate that taxing the wealthy is never as simple as it may appear. For instance, since most capital gains and dividends go to the wealthy, there is always a strong sentiment within the Democratic Party to increase taxes on those sources of income. However, the end result of higher capital taxes (which includes corporate income taxes) is a reduction in the return to capital, so that we see less investment in the economy. That, in turn, translates to less capital—the tools, machinery, and plants that make workers more productive. Ultimately, a person’s income is determined by productivity, which means that higher taxes on capital depress wages—first and foremost the wages of those who work with capital, namely blue collar workers. The notion that labor—and not the owners of capital—bear the brunt of capital taxation is not a radical idea: the Congressional Budget Office and Tax Policy Center assume as much when they create their tax distribution tables.
So while the answer may be that economic growth can fix much of what ails our economy as well as our wretched government balance sheet, how we get there is not so elemental. Fixing the tax code and making it look like it was designed on purpose, to borrow from former treasury secretary William Simon, is not sufficient to do that, but it is certainly necessary.
Berman and Slemrod’s implicit plea is for our government to use the tax code first and foremost to raise revenue—and to do so with the least negative effect on economic growth. Incentivizing bigger home mortgages, the purchase of hybrid cars, employer-provided health insurance, and the myriad other things buried in the tax code should be cut back or eliminated wherever possible. This is because there are inherent problems to incentivizing behavior via the tax code: it allows members of Congress to pretend that their favorite subsidies, when run through the tax code, are “tax cuts.” The less the government uses the tax code to push and prod us in various ways, the more difficult it is to insert such unproductive policies through the code.
It is an unfortunate fact that the odds against tax reform—like any significant change in government, no matter how worthy—are slim. Burman and Slemrod’s primer implies, through the cavalcade of sensible answers to each and every question relevant to the tax code, that it is a battle well worth undertaking. The potential returns to the economy and the citizenry could be significant. It is a shame that this simple fact alone doesn’t factor into the political viability of such a change, but a concentrated group of potential losers invariably finds it easier to band together and defeat a diffuse group of potential winners, even if the winnings vastly outweigh the losses.