The most important building block necessary for a more efficient tax code (that is, a tax code that causes the fewest changes in economic choices while raising revenue) is to have as broad a tax base as possible. For a given amount of revenue, a broad base results in lower tax rates. And lower tax rates result in smaller changes in economic behavior to avoid the tax. In fact, as tax rates increase, changes in behavior because of taxation increase more than the tax rate.
Conceptually, a broad‐base with lower rates is a no‐brainer. The difficulty, however, is in figuring out a way to keep Congress from shrinking the base by carving out politically popular exemptions and preferences over time. The 1986 tax reform — perhaps the most important domestic policy initiative of the Reagan administration — broadened the tax base, lowered tax rates and thus dramatically reduced the influence of taxation on behavior. But in the subsequent 25 years Congress has inserted exemptions and increased rates and thus undermined the achievements of a generation ago.
There is no sure‐fire way to keep exemptions from sneaking back into the code because no Congress can bind future Congresses to past decisions. But Congress can make it harder to pass new exemptions in the future. One proven way of doing so is to require super‐majorities to enact changes in the tax code. Another is to adopt a “pay‐as‐you‐go” rule stipulating that the revenue losses associated with any new exemption are paid for, then‐and‐there, with offsetting tax increases on the entire (rather than just a wealthy minority of the) remaining tax base. The concentrated benefits derived by the recipients of proposed new exemptions may well overwhelm the political push‐back against the diffuse costs (increased tax rates) born by everyone else, but at least voters will confront the marginal costs associated with higher taxes on a smaller base.
Most conservatives, of course, hate pay‐as‐you‐go rules because they hate tax increases. Good; that means they will have every reason to oppose new tax preferences once reforms are put into place.
Of course, how to tax is often less important to voters and the politicians that answer to them than how much to tax. Conservatives are already demanding revenue neutrality as the price for any fundamental reform while liberals are demanding increases in revenue. But too often overlooked in this debate is the fact that there is no such thing as a free lunch. Whatever the federal government spends in a given year must be paid for with tax revenue. So to spend is to tax.
Hence, this debate is really about whether to tax less now in return for taxing more later and, if so, how much of today’s tax bill should be handed off to future taxpayers. Why it is a matter of conservative principle to have future generations pay for services consumed by present generations is a complete mystery to us. Sure, higher taxes will probably mean less economic growth. But if so, it also follows that keeping taxes low while borrowing the difference to pay the bills entails borrowing economic growth from the future.
Exactly how did extracting wealth from those not around to defend themselves become a matter of high conservative principle? In the past, this was justified on two grounds. First, some of that spending benefited future generations (for instance, borrowing to fight Hitler benefited many subsequent generations because they presumably benefit — and thus should pay — from not having to live under the Third Reich). Second, future generations were very likely to be wealthier than the present generation, so this was a means of redistributing wealth from the (relatively) rich to the (relatively) poor.
Alas, most of federal spending today has little to do with the welfare of future generations. Likewise, the belief that future generations will be better off than the present is increasingly in doubt given the massive amounts of wealth that have already been expropriated via deficit financing and under‐financed future obligations.
If limited government means minimizing the reallocation of wealth as a consequence of government action, it means putting an end to this intergenerational theft and taxing whatever is required to pay our bills. If that results in an unacceptably high tax rate, then we should reduce how much we spend.
We think that tax reform can be sold intellectually. But can it be sold politically? The 1986 reform suggests yes. But the political world has changed a bit over the past 25 years, so only time will tell.