Politics & Policy

The Case Against Tax-Reform Leadership

Move on Social Security instead.

When the Republicans took over Congress in 1995, conservatives started talking about comprehensive tax reform. The ambition was to replace a monstrously complex and inefficient tax code with either a simple flat tax or a national sales tax that would make it possible to dispense with the IRS altogether. Republicans even formed a commission, with Jack Kemp as chairman, to recommend a reform plan.

Those recommendations are gathering dust, but the idea of comprehensive reform has proved hard to kill. In 2000, Trent Lott urged George W. Bush to run on it. In recent weeks, we have learned that Speaker Denny Hastert wants comprehensive reform, too. Senator Sam Brownback also seems enthusiastic. Word of the Speaker’s interest has excited some of my colleagues. Larry Kudlow suggests that President Bush should adopt Hastert’s ideas in his convention speech. Stephen Spruiell writes that Republicans should show leadership on this issue, but are unlikely to do so. Bruce Bartlett cautions reformers that a national sales tax is not the way to go.

For what it’s worth, I think that a national sales tax is the worst of the possible options, for some of the reasons Bartlett mentions and a few others. Most important is that a national sales tax (or worse, a VAT) would prove too efficient a money-raiser for the government. Its fans say that it would help restrain the growth of the federal government because people would see its price every time they bought an ice-cream cone. Experience suggests, however, that people would be more likely to monitor their income taxes and property taxes than their sales taxes. Voters seem to be much more easily annoyed by income and especially property taxes than by sales taxes. A conservative policy shift that appeals to that sentiment in the short term–by shifting from property and income taxes to sales taxes–will probably result in the long term in a higher level of taxation.

But it hardly seems worth warning of the dangers of a national sales tax, since the odds of its becoming law in the next decade are approximately the same as those of George W. Bush’s becoming a Buddhist. Other comprehensive reforms do not have much better chances. Maybe the least likely is Hastert’s daydream about a Value Added Tax. Years ago, Grover Norquist helped to organize a House anti-VAT caucus. Dick Armey and Tom DeLay were the caucus’s chairmen. Norquist believes a VAT is a hidden tax that would be too easy for the government to raise. Does anyone really think that Bush will make the centerpiece of his second term a tax proposal that Norquist and DeLay strongly oppose? Note also that an attempt at comprehensive tax reform in Texas was one of Bush’s rare legislative stumbles as governor.

It’s not going to happen.

Conservatives have several legitimate goals when it comes to tax reform: eliminating deductions that clutter the code, distort economic activity, and reward lobbying; reducing the top rate of marginal taxation; reducing average tax rates; and reducing the tax code’s bias against savings and investment. Comprehensive tax reform is a way of trying to achieve all these goals simultaneously. If we were being realistic, however, we would set priorities among them.

It is extremely difficult, politically, to eliminate all or even most of the tax deductions, each of which has a constituency that is far more interested in its continuation than anyone is interested in its demise. The economic benefits probably aren’t worth the political risks. Flattening the rates is also hard. Republicans would have to choose one or more of the following unpalatable options: raise taxes on lower-income workers, massively increase the deficit, or make the plan ride on the assumption of huge increases in economic growth.

If flattening the rates is off the table, most conservatives would say that the second most economically important goal is making the tax code less hostile to savings and investment. As it happens, this goal is politically achievable. Bush has already taken some steps in this direction by cutting taxes on dividends, capital gains, estates, and health savings accounts. His Treasury Department has proposed going further, by expanding and consolidating IRAs, 401(k)s, and other tax-sheltered savings accounts.

A pro-investor agenda can be achieved incrementally, with each step helping to create the conditions that make the next one possible. The limits on the amount of savings that can be held in a tax-sheltered account can always be raised, and the purposes for which the savings can be used can always be increased. Comprehensive tax reform creates enormous transition problems; not so an investor strategy. Finally, the growth in the number of people involved in the stock market means that a pro-investor strategy has a constituency not limited to ideologues.

There are reasons to think that a pro-investor strategy will expand the constituency for other free-market reforms. The campaign for comprehensive tax reform, on the other hand, has accomplished nothing for conservatives over the last ten years, and seems likely to accomplish nothing over the next ten.

The most ambitious, and most potentially rewarding, item on a pro-investor agenda is of course the creation of private investment accounts within Social Security. Instead of pushing for tax reform, free-market-minded conservatives ought to be urging the president and Republican congressmen to take up that idea.

Ramesh Ponnuru is a senior editor for National Review, a columnist for Bloomberg Opinion, a visiting fellow at the American Enterprise Institute, and a senior fellow at the National Review Institute.


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