Topic: Tax and Budget Policy

Everything You Need to Know about Deductions, Loopholes, and Special-Interest Tax Provisions

Why does the tax code require more than 10,000,000 words and more than 75,000 pages?

There are several reasons and none of them are good. But if you had to pick one cause for all the mess, it would be the fact that politicians have worked with interest groups and lobbyists to create myriad deductions, credits, exclusions, preferences, exemptions, and other loopholes.

This is a great deal for the lobbyists, who get big fees. It’s a great scam for politicians, who get lots of contributions. And it’s a great outcome for interest groups, who benefit from back-door industrial policy that distorts the economy.

But it’s not great for the American people or the American economy.

Universal Savings Accounts (USAs) Introduced

I have proposed that America adopt a Canadian-British innovation to encourage greater household savings. Canada’s Tax Free Savings Accounts (TFSAs) and Britain’s Individual Savings Accounts (ISAs) are revolutionizing savings for moderate- and middle-income families in those countries.

Now Americans may get a chance to save in a similar tax-friendly vehicle. Senator Jeff Flake (R-AZ) and Representative David Brat (R-VA) are introducing companion Senate-House bills to create Universal Savings Accounts (USAs). The accounts are like supercharged Roth IRAs.

Here are some of the features of the Flake-Brat USAs:

  • Americans could save without the restrictions, confusion, and penalties associated with other savings accounts.
  • Anyone 18 years of age or older could open a USA, contribute up to $5,500 after-tax a year, and use the tax-free withdrawals for any purpose at any time.
  • Funds would be invested in bonds and equities, and grow tax-free.
  • USA accounts would allow individuals to decide what to use their savings for and when, without Congress micromanaging their choices, as they do with other accounts.

Flake and Brat cite data showing that only 53 percent of adults could currently cover an emergency expense of $400 without selling an asset or borrowing, and most Americans do not have the recommended three to six months of income in their current savings accounts.

As Ernest Christian and I have noted, USAs would help solve these sorts of problems for many Americans by giving them a savings account that maximized liquidity and flexibility, while zeroing out taxes that eat away at returns. Flake and Brat are right that their USA accounts would encourage more savings by Americans at all income levels.

House Speaker Paul Ryan is known to admire these sorts of accounts, and numerous Republican presidential candidates have pro-savings features in their tax plans. So if the next president is a Republican, we should have a good chance at making these pro-family, pro-growth savings accounts a reality.

Richard Nixon’s VAT

With two Republican presidential candidates embracing a value-added tax (VAT), it is worth looking back at the original federal debate over that bad policy idea.

Richard Nixon appears to have been the first U.S. leader to push for a VAT, which is not surprising given that he was perhaps the most statist GOP president of the 20th century. With a three-percent VAT in mind, Nixon called for new federal financing of local schools in his 1972 State of the Union address.   

A 1972 Congressional Quarterly article examined Nixon’s VAT. (The first link when you Google “richard nixon vat congressional quarterly”). The article reveals that the administration looked fondly on a VAT because of its large revenue-raising potential—both for funding schools and for funding a general expansion of the welfare state:

Two major reasons were apparent for the Nixon administration’s consideration of a value added tax. The first was the condition of federal finances.

The budget for fiscal year 1973, which the President sent to Congress Jan. 24, included a five-year forecast showing that in fiscal 1977 the only surplus funds foreseeable would result from a proposed increase in Social Security taxes. Projected costs of existing and proposed programs were expected to absorb all revenues from existing taxes and other sources. This meant that no new programs could be inaugurated without new taxes to finance them or reduction of existing programs to release funds. Though initially pledged for education, revenues from an expanding value added tax might provide future funding for other programs.

The second reason was the situation in public schools and school districts.

Debunking Fiscal Myths: There Is No Loophole for “Carried Interest”

I’m a big fan of the flat tax because a low tax rate and no double taxation will result in faster growth and more upward mobility.

I also like the flat tax because it gets rid of all deductions, credits, exemptions, preferences, exclusions, and other distortions. And a loophole-free tax code would be a great way of reducing Washington corruption and promoting simplicity.

Moreover, keep in mind that eliminating all favors from the internal revenue code also would be good for growth because people then will make decisions on the basis of what makes economic sense rather than because of peculiar quirks of the tax system.

Sounds great, right?

Well, it’s not quite as simple as it sounds because there’s a debate about how to measure loopholes. Sensible people want a tax code that’s neutral, which means the government doesn’t tilt the playing field. And one of the main implications of this benchmark is that the tax code shouldn’t create a bias against income that is saved and invested. In the world of public finance, this means they favor a neutral “consumption-base” tax system, but that’s simply another way of saying they want income taxed only one time.

Folks on the left, however, are advocates of a “Haig-Simons” tax system, which means they believe that there should be double taxation of all income that is saved and invested. You see this approach from the Joint Committee on Taxation. You see it from the Government Accountability Office. You see it from the Congressional Budget Office. Heck, you even sometimes see Republicans mistakenly use this benchmark.

DHS Computer Project: A Record Cost Overrun?

Politics and bureaucratic mismanagement drive up costs and generate failure in the federal government. More evidence comes from a Washington Post report today on a botched computer project at the Department of Homeland Security:

Heaving under mountains of paperwork, the government has spent more than $1 billion trying to replace its antiquated approach to managing immigration with a system of digitized records, online applications and a full suite of nearly 100 electronic forms.

A decade in, all that officials have to show for the effort is a single form that’s now available for online applications and a single type of fee that immigrants pay electronically. The 94 other forms can be filed only with paper.

This project, run by U.S. Citizenship and Immigration Services, was originally supposed to cost a half-billion dollars and be finished in 2013. Instead, it’s now projected to reach up to $3.1 billion, and be done nearly four years from now.

A six times cost overrun! That is epic. I’ve described Edwards law of Cost Doubling in government, but this DHS project rises to an elite screw-up category reached by the Big Dig, the San Francisco-Oakland Bay Bridge, and a veterans hospital in Denver, which all more than quadrupled in cost.

Other than “shoddy planning” and mismanagement, what else contributed to the latest DHS screw-up? The Post reports on the role of politics:

By 2012, officials at the Department of Homeland Security, which includes USCIS, were aware that the project was riddled with hundreds of critical software and other defects. But the agency nonetheless began to roll it out, in part because of pressure from Obama administration officials who considered it vital for their plans to overhaul the nation’s immigration policies, according to the internal documents and interviews.

… By 2012, the system’s fundamental flaws — including frequent computer crashes and bad software code — were apparent to officials involved with the project and, according to one of them, and it was clear that “it wasn’t going to work.”

But killing the project wasn’t really an option, according to officials involved at the time. President Obama was running for reelection and was intent on pushing an ambitious immigration reform program in his second term. A workable electronic system would be vital.

“There was incredible pressure over immigration reform,” a second former official said. “No one wanted to hear the system wasn’t going to work. It was like, ‘We got some points on the board, we can go back and fix it.’ ”

For more, see the new Downsizing Government essays Federal Government Cost Overruns and Bureaucratic Failure in the Federal Government.