Tax Reform: Congress Was Never Intended to Plan the Economy

Our tax code needs to be reformed because it’s a mess, and Congress created it.

As Congress gets down to the task of reforming the tax code, I find myself asking: Why is this necessary?

No doubt, tax reform is necessary. Our tax code is a mess, to say the least. But why is it a mess? The answer, at bottom, has to be Congress itself. The legislature is solely responsible for setting tax rates, exemptions, and deductions. It is therefore reforming a tax code that it alone deformed.

To put it bluntly, Congress is not well suited for national economic planning, which is basically what pro-growth tax policies boil down to. As a matter of fact, Congress outsources a lot of economic planning — like environmental regulation — to the bureaucracy, because it knows it is not capable of handling such matters for itself. It keeps tax policy within the legislature primarily because that doubles as a way to distribute political benefits to key constituencies.

The problem is an institutional one. It is really not accurate to say that Congress is a “national legislature,” for there is no member in either chamber who is elected by the nation at large. Instead, it is the meeting place of representatives of discrete geographical constituencies. This inclines the legislature to parochial concerns rather than national ones — a tendency that is exacerbated by the fact that senators are apportioned equally among the states, regardless of population. Moreover, our campaign-finance system, whereby those who contribute most to political campaigns are those with pressing business before the Congress, gives each member of Congress yet another incentive to view policy problems from the perspective of a very small slice of the nation.

This design made sense when the Constitution was ratified, when there was little expectation that Congress would take charge of planning or directing the national economy. And indeed, seeing as how this was still a generation before the Industrial Revolution really began in the United States, there was little by way of an economy to plan. GDP in 1790 was just $5 billion in today’s dollars.

If you look at the relatively narrow set of congressional powers enumerated by the Constitution, you will not see any clause that specifically sanctions promoting national economic development. Congress had to read between the lines to acquire that authority.

In the Report on Manufactures, submitted in 1791, Alexander Hamilton argued that Congress’s power to “lay and collect taxes . . . to provide for the common defense and general Welfare of the United States” validated his ambitious plan of national development. However, his political opponents thought he was grossly misreading what was originally intended to be an anodyne statement. And the matter was left at that, more or less, for another 20 years.

Though the means of congressional planning have changed — the tariff is out, the income tax is in — the final result is as maddening as ever.

It was only after the War of 1812 that Congress began to take seriously the need for economic planning. The primary tool for this task was the protective tariff, intended to stimulate domestic industry by shielding it from competition abroad, particularly Great Britain. Yet it was not long before the tariff devolved into a regional logroll, aiding the North and West at the expensive of the South, which is what brought about the first threat of secession. The Tariff of 1828, often called the Tariff of Abominations, was, according to historian George Dangerfield, “an undisguised hunt for special advantages,” demonstrating that “the central government was expected to give assistance, but never to plan the assistance that it gave.”

As the 19th century wore on, the protective tariff took root in American political life. Arguably, it facilitated economic development in the early phases of the Industrial Revolution, but by the end of the century its purpose was predominantly political. Republican politicians used it to reward the industrial magnates who financed their campaigns, win the votes of the working class, and even buy off the Civil War veterans. The tariff produced a massive surplus in revenue, which was appropriated for ever- generous pensions for Union soldiers.

The tariff regime fell apart during the Great Depression, when the Republican-dominated Congress passed the Smoot-Hawley Tariff of 1930. This law made manifest all the flaws inherent to legislative planning of the economy. Originally intended to offer added protection for industries in the midst of economic decline, it became the most obscene logroll in congressional history. The Depression worsened thereafter, free trade became the new aspiration, and economic planners turned to the income-tax code.

Though the means of congressional planning have changed — the tariff is out, the income tax is in — the final result is as maddening as ever. The income-tax code is such a complicated morass that Americans spent 1.35 billion hours on their taxes in 2012, and spent $20 billion on compliance costs alone.

This is a consequence of that old parochial imperative inherent to Congress. The late Barber Conable, ranking member of the House Ways and Means Committee, called it the “ABC Syndrome”:

Suppose that someone — a business person, a wage earner, or a retired person approaches his or her representative in Congress and says, in effect: “What you have done in the tax system is fundamentally all right, but I have a very unusual situation, you see, and it is not fair for me to have to be taxed this way just because my neighbor thinks it is all right.” Suppose further that the member of Congress looks at the matter and agrees with the taxpayer, called “A.” The member takes the case to the Committee on Ways and Means, and the committee also finds that “A” is, indeed, in a different situation and should be treated differently, i.e., more fairly. So, “A” gets an exception in the tax code — an exception that fits all the other “A’s” who are similarly situated. A year or so passes and along comes taxpayer “B,” who tells Congress: “What you did for ‘A’ was good. It is an appropriate exception. But I am situated a little differently and what you did for ‘A’ is having an adverse effect on me. Please take a look and see if you don’t agree.” Of course, Congress does agree, and provides an exception to the exception in order to take care of “B.” Then, about a year later, taxpayer “C” approaches Congress, and you know what happens. An exception to the exception to the exception for “C.”

This is no way to plan an economy! Still, Congress really cannot help itself, because the Framers never really intended it to plan an economy in the first place.

So the need for tax reform is a good illustration of the limits of Congress as an institution. It shows what happens when people expect a government initially designed for limited purposes to take on an expansive, nearly limitless portfolio. The ABC Syndrome is part of the congressional DNA, and will always undermine the grand ambitions of our would-be national planners.

An Anti-Growth Tax Cut

NR Editorial: An Opportunity for Pro-Growth and Pro-Family Tax Reform

— Jay Cost is a contributing editor of The Weekly Standard and the author of A Republic No More: Big Government and the Rise of American Political Corruption.