Friday, June 28, 2013

No-ing thyself - Aaron Wildavsky's notion applied to Tax Reform

Aaron Wildavsky was a remarkable scholar.   My experience with his work began as an undergraduate when I read one of his first books (The Politics of the Budgetary Process).   But it kicked into high gear during my doctoral studies.  One of my professors suggested that part of completing a doctorate was to be an active member of the scholarly community.   That was harder then than it is now but I none-the-less tried to do it.   I wrote a paper on power relationships which mentioned Wildavsky and so I sent him a copy of the paper.   He sent it back with some comments.   But I discovered that I also became part of his network.   Almost until he died I became a pre-reader of some of his books.   He wrote a book on risk theory and also one on taxation and expenditure.   In both cases I got a very early draft.   I made minor comments on the risk book - because I was just getting into the area - I now serve on an insurance company board and actually helped to set up a specialized insurance company based in part on some of the things I learned in his book.   But the one on taxation and expenditure I did a lot of comments - tax and finance were two key areas so I had a lot to say.   The version I got was a draft (an early one) and when he published the final one, it became a mainstay in the area.   I asked my professor (who had made the original suggestion) and he said "Yeah, the way Aaron writes books is he does some preliminary research, sends a draft out to a lot of people and then is great at reading the comments and synthesizing new ideas from all the people he sent the manuscript to" in essence we served as unpaid research assistants.

I mention that because about the time one of the ideas that Wildavsky was suggesting was to "No" thyself.   The idea was simple - establish elements in a fiscal constitution which would prevent wild and crazy excesses.   The 2/3 vote requirement in Proposition 13 is a good example of the principle.

This week the Chair and Vice Chair of the Senate Finance Committee (Max Baucus and Orrin Hatch) proposed a new twist on the idea.   They sent out a dear colleague letter which suggested that they wanted to start the process of tax reform.   And that rather than picking and choosing which elements should stay in the code, they would begin with the principle that everything would go out, everything!   If someone could make the case for something to stay in - they would consider it - but as a starting point everything would go out and every provision in the code would have to justify its existence.   If a provision cannot prove that it helps to grow the economy or make the code fairer or promotes some other important policy objective - it goes and stays out.

The code is now 74,000 pages/ 9 million words.   A George Mason Mercatus Center report suggested that tax compliance costs us all about a trillion dollars each year.   The complexity also loses something close to half a trillion annually in under or unreported income.   So simplification would be a big boost for all of us.

If the two senators are successful they might be able to halve the top rate for personal income taxes.    Most political observers have argued that the tax code is too tough to tackle because benefits are concentrated and costs are diffuse.  But this approach would put everything on an equal footing.   One wonders whether this is a variation on the strategy played in 1986 when the most significant tax bill of the last half century was adopted or whether this is simply a dodge.   For those who care about the real costs of the current code (and I count myself in that lot) this would be a good starting point.

There are two elements which argue against 2013 being 1986.   First, in 1986 you had a president who was willing to fight for the principle of simplification - against the opposition and members of his own party.   He also recognized that allies can come from strange places like Oregon (Bob Packwood), New Jersey (Bill Bradley) and Chicago ward politics (Dan Rostenkowski) and even Massachusetts local politics (Tip O'Neill).    Second, 1986 saw two things we may not have now - a House committed in part to significant reform (Bill Camp the chair of Ways and Means may be that person) and some public pressure for simplification.  

Were all the stars to align we might have the opportunity to put together a reprise of 1986 - which brought about more revenue and significant prospects for economic growth.  Most likely if this were to begin to advance it would be in an even numbered year (2014); but I would still say this bold no-ing thyself is a long shot.


Lloyd Leanse said...

I might be in favor of the proposal, but question some of the conclusions in the George Mason study. The cost of compliance is $1 trillion? That's about the same amount as is spent on all of education, and, as acknowledged by the report's authors,40% of the amount collected in income taxes. That seems very high. Also, the study says that the IRS estimated that "individuals spent more than 3 billion hours complying with personal deductions." Does it seem reasonable to think that every adult and child spent an average of 8-ish hours on this task?

Jonathan Brown said...
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Jonathan Brown said...

The George Mason study is only one of many. Compliance costs in most studies are based on the cost of record keeping and tax preparation for the PIT (individual) and Corporate taxes. One example of the costs of compliance relates to keeping up with changes. In the first decade of the 21st century there were almost 4500 changes in the code (more than 400 per year). As the code continues to be more complex - two things happen - compliance costs go up and more and more people shave their income (estimate is loss of about $450 billion) our compliance rate (the percentage of income reported is now about 85%.

Finally, depending on how you count spending on education (K-12 or higher ed too) the compliance cost estimated by Mercatus is a drop in the bucket in total spending for education. Remember that Pells alone are in the range of $3 billion annually. (2007 agreement stipulated $33 billion for Pells over the next 10 years).