Tax Reform is (Almost) Impossible

Ezra Klein today has a terrific overview of why corporate -- and individual -- tax reform is so difficult. Part of this is a classic collective action problem. The advantage in a clean tax code is generally something that's equally shared by everyone, while the costs of removing each preference or loophole will be absorbed by specific corporations (or individuals), all of whom would be best off if tax reform was passed but their particular provision was retained. So if everyone gets their first preference, you get a reform that retains every preference, which turns out to be...no reform at all.

Indeed, it's even worse. Remember, every single provision of the tax code is exploited by some company (or group of individuals) who would be aware of its loss. The gains, on the other hand, are a lot harder to see, even if they are real. So it's quite possible that individual corporations might mistakenly believe that reform will be flat-out bad for them (as opposed to the collective action problem in which they understand that it would be good, but would just prefer to opt out of the costs). And that's before getting to the problem that some individuals and departments within corporations might have mixed incentives here because tax reform might cost them their jobs.

And then there's yet another problem: tax reform is basically never a high priority for either party. It's no coincidence that the last major successful tax reform took place in 1985-1986, during a rare period in which not only was there divided government, but no one expect that to change in the near future. It's only in those situations when ambitious politicians looking for something to accomplish turn from their party's agenda, which is impossible to pass given divided government, and take what they can get. If there's unified government, the governing party naturally attends to its highest priority items that can pass -- no tax reform there. In divided government periods such as the current one in which one or both parties anticipates unified control after the next election, then the kind of bipartisan cooperation necessary is usually impossible. How often do you get those opportunities? Maybe 1955-1956 when Ike was president; perhaps chunks of the Nixon years; 1985-1986 for Reagan; 1989 and 1990 for George H.W. Bush; and 1997-1998 for Clinton. I'd have to double-check, but I think that's it...over the last century. However, it is worth noting that a status quo election or close to it this year might set up another such situation in 2013-2014.

Hey, maybe I should have put that up top in this post: if you really want tax reform above all else, vote the all-incumbent ticket in November.

But of course I'm very, very certain that there isn't a single person reading this who has revenue-neutral comprehensive tax reform as his or her top policy priority.