You can reform government policies, but you cannot guarantee the reforms will stick.
After the 1929 crash, government regulation of financial institutions increased for four decades. Then regulation waned for nearly as long. It is pretty clear the cycle once again is reversing toward greater oversight.
In general, though, reformers must realize their task is like that of Sisyphus, the mythological character condemned to eternally push a large rock up a mountain only to see it roll to the bottom again.
Recently, Rep. Ann Lenczewski, DFL-Bloomington, introduced a bill in the Minnesota Legislature that would eliminate many specific tax breaks in the state corporate income tax. In return, her bill would cut the corporate franchise tax by 1 percentage point and would eliminate the alternative minimum tax on businesses.
My purpose here is not to evaluate that bill, but to examine the issue of simplifying taxes and broadening the tax base while lowering overall tax rates. Like most other economists, I think this is generally a good idea. But political realities have a way of undercutting many attempts at reform.
That happened with the tax changes enacted in the 1980s during the Reagan administration. Marginal rates for individual income taxes dropped substantially. Myriad provisions that benefited only a few disappeared.
People differ a great deal on whether the net effects of the Reagan-era tax changes were good or bad. But the tax code was simplified and many special provisions that wasted society’s resources were eliminated, at least temporarily.
There is the rub. Before such bills are even signed into law, those who lost some special break begin planning to get it back. They retain high-powered tax lawyers and lobbyists. They form new political action committees. By the beginning of the next legislative session, draft bills restoring lost benefits are in the hands of key legislators. Few may be adopted, but the process of tax complication has started anew.
Some special deals may be both just and economically efficient. Any law that applies identical treatment to all inevitably treats a few unjustly or creates incentives that waste resources. Fixing these cases would benefit society.
The problem is that for every instance where some special provision would benefit society as a whole, there are 20 where some individual or company just wants to nurse at the public udder. Once you open the gate to restore fairness or efficiency for a few, dozens seeking unjust and inefficient special treatment will rush through before it can be closed again.
The problem snowballs. After a reform that closes many loopholes, lawmakers can resist special-interest pleading on the argument that no one is getting favorable treatment. But once several special tax deals are recreated, it becomes increasingly hard to resist constituents or campaign donors who arrive demanding their own ladles full of gravy.
The elimination of loopholes in the 1980s was far from complete and began to suffer erosion almost immediately. In the George H.W. Bush and Clinton administrations, a trickle became a stream. After 2000 it became a flood.
What can be done to keep this from happening to future reforms? Congressional leadership can make a difference. Certainly, it would be unlikely for all politicians to become paragons of virtue. But taking a historical view, our country has enjoyed eras when House Speakers like Republican Thomas Reed of Maine or Democrat Sam Rayburn of Texas limited the worst excesses. And we also have suffered under key leaders, like Democrat Dan Rostenkowski of Illinois or Texas Republican Tom DeLay, who turned Congress into a fiscal brothel.
Campaign financing is the Achilles’ heel of many reforms. Without intending to, we have developed a system in which members of Congress feel they have to fundraise unceasingly. That plays into the hands of special interests.
Special tax treatments often can be created quietly, without appearing on the national radar screen. Unlike the hot-button issues of abortion or gun control, no one pays much attention to a provision added to a bill in conference committee granting tax credits to bald economists with ingrown nails on their right big toes.
Simplifying the tax code and eliminating special treatment should be a priority for both parties at the state and national level. But the cycle will always continue.
© 2008 Edward Lotterman
Chanarambie Consulting, Inc.