Tax Reform as Maximizing Congressional Happiness

May 25, 2005

From Alan J. Auerbach and Kevin A. Hassett in their new book Toward Fundamental Tax Reform:

[E]ven if the task of enacting reform is accomplished, it will be Sisyphean if politicians immediately begin undoing their own handiwork. This view was perhaps best expressed by Nobel laureate Milton Friedman, who argued that politicians might enact tax reforms simply to maximize their own happiness:

The political function of the income taxes, which is served by their being complex, is to provide a means whereby the members of Congress who have anything whatsoever to do with taxation can raise campaign funds. That is what supports the army of lobbyists in Washington who are seeking to produce changes in the income tax, to introduce special privileges or exemptions for their clients, or to have what they regard as special burdens on their clients removed. A strict flat-rate tax would offer nothing that any lobbyist could hope to achieve since the structure of the tax is so simple and straightforward. (Milton Friedman, “Why a Flat Tax is Not Politically Feasible,” Wall Street Journal, March 30, 1995.)

In such a world, politicians peddle special tax favors to various interest groups and campaign contributors. After many years of such activity, the tax code becomes so complex that it is difficult to add new favors. At that point, the slate may be wiped clean again, but only so the process begins anew.

Download the full book in PDF format here.

(See also: “Is Bad Tax Policy an Equilibrium?“)

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