What If Federal Tax Policy Were Conducted Like Monetary Policy?

August 15, 2006

We’ve posted the latest episode of our “Tax Policy Podcast” this morning, featuring a terrific interview with economist Martin A. Sullivan, contributing editor at Tax Analysts.

Much of the interview is focused on worldwide trends in corporate taxes, and whether the U.S. is falling behind other countries. But toward the end of the interview there’s a discussion of a provocative thought experiment Sullivan outlined in a recent article titled “Tax Incentives and Economists.”

The idea is simple: what would federal tax policy look like if it were conducted by a quasi-independent agency like the Federal Reserve Bank, instead of Congress? And conversely, what would monetary policy look like if it were governed by the whims of Members of Congress, rather than the Fed?

Here’s the clip from the transcript:

Scott Hodge: In an article you wrote titled “Tax Incentives and Economists,” you start out with a little thought experiment about what taxes might look like if the federal government ran tax policy like the Fed runs monetary policy. Sort of getting the politics out of it. Tell us a little bit about this “social science fiction,” as you call it.

Martin Sullivan: Well, now you’re forcing me to confess something that I never tell anybody, which is that I’m not a trained tax economist. I did all of my early research in monetary policy, a lot of work in history of monetary policy. It’s fascinating when you look at the difference between the way monetary and fiscal policies are run in this country.

Early in the 20th century, legislators realized that monetary policy was too important to leave under the control of politicians. So Congress delegated a lot of discretion to the Federal Reserve. I think that it’s fair to say that it’s been a success, largely because politics — particularly parochial politics – have been kept out of that policy making. Now, meanwhile, in tax policy and fiscal policy, politicians feel they have the right and even the duty to meddle in every little aspect of the law.

In the article that you mentioned, I realize it’s a fantasy, that I think we could do a little bit better if we could reconfigure our fiscal institutions in the US, so that Congress would get out of the business of picking winners and losers. It’s a fantasy. I don’t think it’s going to happen soon.

Scott Hodge: Well, as we’ve all been in town long enough to watch how the sausage is made, it’s not such a bad fantasy after all.

Martin Sullivan: Well, I think it’s important to sometimes set high standards, and hope that maybe somebody will catch on to it sooner or later.

Check out the full interview here.

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