Sunday, July 24, 2011

Tax Demagogue

Grover Norquist (Harvard BA and MBA) who is head of Americans for Tax Reform, was quoted in the WSJ on Friday with his definition of acceptable limits on the tax pledge.   He said  If a tax-reform plan would raise more revenues than current rates – i.e. the Bush-era rates that are now in effect – then it’s a tax increase. “Present tax policy is what you should go by,” 

Mr. Norquist's definition is a bit much to take even for one like me who believes that taxes should be very hard to raise.   In part it is because his definition would have rejected the most effective tax reform bill in recent history - the 1986 Tax Act.   

No one with a sane mind can believe that the current income tax system is working.  The Tax Foundation's most recent estimates suggest that about 24% of the revenues collected by the IRS are compliance costs - the additional burden that taxpayers face in trying to work their way through all the thatch that has been created to aid this or that activity.  In the current year that is worth $350 billion (estimated).     That is not chump change.

The 1986 Tax Act exchanged lowered top rates (from 50% to 28%) for a lot of pruning of deductions, exclusions and credits.   The costs of compliance were less third of today's in current dollars.  (Unfortunately the Tax Foundation's estimates of compliance costs do not go back to 1986.  The estimates stop at 1990.)   The reality is that taxes as a percentage of GDP and nominal tax revenues both went up after the 1986 Act.   But the tradeoff was clear the bill created a more efficient tax system.   That is a tradeoff that today's policy makers should relish but Mr. Norquist doesn't seem to get it.   

Mr. Norquist evidently has never read Adam Smith on Taxation.    Smith had four maxims on the ideal tax system including   "IV. Every tax ought to be contrived as both to take out and to keep out of the pockets of the people as little as possible over and above what it brings into the public treasury of the state."  But then at least Mr. Norquist is consistent.  He also opposes ending the ethanol subsidy in the tax code.   Why anyone takes him seriously is beyond me.

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