As the President’s TaxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. Reform Panel prepares to deliver its recommendations, it is useful to examine why extensive tax reform is necessary, and consequently unlikely.
Tax reform is necessary because politicians have complicated the tax code for years by carving out special provisions aimed at buying votes with taxpayer money. Mindless tax cuts masquerading as tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. s are a glaring example of this type of irresponsible tax policy.
The expansion of the child credit in 1997 is one example of a mindless tax cut. The goal of the credit was to reduce taxes for a particular segment of the population: those with children. The result is that while the tax burden has fallen for those targeted by the credit, the overall tax code is less neutral and more complex.
Years of irresponsible tweaking of the tax code to curry political favor has led to a tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. riddled with huge gaps and holes. Tax reform is now necessary to fix these problems.
However, large-scale tax reform is unlikely for the same reason it is necessary. Special interest lobbies that exist solely to maintain the deductions, exemptions, and credits granted by politicians to their constituents will make any sweeping reform virtually impossible.
The lesson for policy makers is simple: design and use the tax code to raise revenue to fund government, not for social engineering or to gain political favor.
Share