It is time for people in Washington to acknowledge it is impossible to get a truly simplified tax code in this current political climate. It is simply inconsistent with the other driving ideological preferences in Washington, which includes the idea of very low federal “spending”, low taxes, and a Congress that plays an active role in setting policy. It is possible to fulfill two or three of these goals at once, but not all four.
President Obama’s new budget is a prefect example of how a truly simple tax code is incompatible with the top goals of the two parties. The overview calls for making the “tax code more simple and fair” by closing tax loopholes. Yet, just a few lines later it calls for multiple new tax incentives to promote several proposals.
There is a new tax credit for small business hiring. A new tax credit to encourage business to offer retirement accounts. A new tax treatment for small business investment. Several new tax incentives for hiring and investing in “Promise Zones.”
This is the problem. If you want the government to do something you can either have the government directly spend money on a new program or create a system of tax incentives. In a sane world these two options would be equal, but the leaders in Washington are not sane.
In the current political climate government spending is inherently bad, but lower taxes are inherently good that never need to be paid for. This applies even when “lower taxes” take the form of just using the tax code to have the government give out money.
The only way government sets new policies these days is by using the tax code, no matter how inefficient that option might be. Think of the Affordable Care Act. Instead of simply spending money on a new government insurance program it used a jerry-rigged combination of tax credit, tax penalties, mandates and cross subsidies to create a solution.
The bulk of the “loopholes” and complexity in the tax code are about advancing specific policies. If you try to eliminate all loopholes without increasing government spending then you basically eliminate the ability of Congress to set policy. Setting policy is not a power Congress is willing to give up.
Photo by 401(K) 2013 released under Creative Commons License