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Thursday, April 17, 2008

Public Choice Theory and Taxation

I noticed this column in the WSJ the other day:

"People say all the time: 'We can't pick winners and losers.' Well then fine. Take every single dollar of subsidy out of the federal tax code. Get rid of it all. . . . Let's have a real level playing field where nobody gets a penny in subsidy."
– Hillary Clinton, quoted in USA Today, April 5, 2008

Now, there's a capital idea – and just in time for April 15. The simplest, fairest and most economically efficient tax code would end all special interest tax advantages and flatten tax rates. Except Mrs. Clinton was ridiculing this idea. She went on to say that if subsidies vanish from the tax code, we'd "hear the squeals of protest from Wall Street to Houston to Silicon Valley."

Her philosophy certainly fits with that of the current Congress, which is becoming a tax loophole production factory for the powerful.
This giveaway came only a few weeks after the National Association of Home Builders threatened to suspend their PAC contributions to Congress "until further notice" – meaning until they saw more return on their political investments. Congratulations. That gambit paid off big time. Other winners include the large Wall Street banks that have lost money in the subprime mortgage meltdown, including Citigroup, Merrill Lynch and Morgan Stanley, which also qualify for rebates to offset current losses.

With this loophole factory open for business on Capitol Hill again, business lobbies are spending more money than ever to curry Congressional favor.

At least this exercise is making clear what Democrats really mean by tax "fairness." It means raising tax rates so they can then sell tax breaks to the highest corporate bidder. We have certainly come a long way from 1986, when a Democratic Congress joined with Ronald Reagan to strip the tax code of most tax deductions and lower tax rates to a high of 28%. That reform spirit is dead on Capitol Hill.
When people in great numbers profess to want tax simplification or the elimination of subsidies of various kinds and yet politicians ignore this it is often fruitful to examine the matter from a public choice theory perspective. Who better to turn to in such matters than James Buchanan.

I am reminded of this, reviewed here:

The editor of the Journal of Economic Perspectives, Joseph Stiglitz, asked me to write a piece assessing the 1986 act from a public-choice perspective. I wrote an article that was pub­lished in 1987 in the Journal of Economic Perspectives (Bu­chanan 1987). I am very glad I am on record with that piece because all of my predictions turned out to be precisely on target. Because I predicted from a public-choice perspective that Congress had exhausted the rents that it could get from selling loopholes. Therefore if it could sweep them all clear and cut the rates, it would then have the chance to raise more revenue by immediately starting raising rates again with a wider base, which is what Congress did. Second and more important, once Congress had wiped out all those rents, it could then start reselling the rents. And of course that is exactly what happened. The act was hardly cool off the presses when Congress started putting in new loopholes, new changes. It did that in the 1990 schemes, and it did that again in the 1992 schemes, and, of course, Clinton is doing that with abandon now. When they talk about targeted taxes and targeted programs, which is nothing more than selling loopholes for these rents. I am unhappy, as Richard Mus­grave surely is, with what has happened since the 1986 act, but that is predictable, necessarily predictable, given the way we make tax policy. And I think if you come at this from a public-choice constitutionalist perspective, you do in fact get a totally different view on the whole fiscal state or fiscal structure.

The members of the sausage factory known as Congress are very adept at acquiring campaign contribution or other things they are desirous of in return for various tax breaks, subsidies or protection from onerous regulation (wait that last one is a good thing) . This is one reason why changes with very broad support are often difficult to realize.

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