Tax Reform Part 1 of (?)
We may as well start talking about tax reform, because while tax reform might not happen in the next couple of years eventually it is something that will have to be done. The current tax code keeps growing and growing, but politicians feel a need to “progress” instead of delete (which because of its rareness I call progressive), so the tax code continues to grow.
Additions to the tax code are made for several reasons. One reason a change is made is to close a loophole that allows businesses to escape taxation. The other type of change is the inclusion of a exemption, or in other words the creation of a loophole. Economically efficient is not the phrase that would be used to describe the US tax code because of this process.
The first problem in reforming the tax code is scoring.
In 1988, Senator Robert Packwood (R-OR), ranking Republican on the Finance Committee, asked the JCT to estimate the revenue impact if the government confiscated all income over $200,000 annually.
The revenue estimators at JCT responded that such a tax would raise $104 billion the first year, $204 billion the second year, $232 billion the third year, and $263 billion and $299 billion in the fourth and fifth years, respectively. As Senator Packwood noted, however, this view of the world is impractical because it “assumes people will work if they have to pay all their money to the Government. They will work forever and pay all of the money to the Government when clearly anyone in their right mind will not.” (I took this from a Heritage Report)
The true story, above, illustrates what is called static scoring, and is used by all of the relevant scoring agencies- CBO, OPM, and JCT. Static scoring is blind to human decision making and is therefore also blind to rational or useful forecasting. Never the less it used every day on Capitol Hill, which I guess is a place that is devoid of rational thoughts, so it fits.
The real trick is to use dynamic scoring, but admittedly dynamic scoring comes with its own set of issues. I will be talking about dynamic scoring in Part 2.
