Understanding the Special Interest State — Tax Breaks

The Right Coast (Tom Smith) makes an important point about the relationship of tax deductions to the current political mess:

[Tax deductions] are the very catalog of political influence in this country. The real estate industry, the non-profits, the long list of other deductions you can take: The tax code is the fine print of the social contract on which the fat belly of Leviathan comfortably rests. Those of us squished by its slimy blubber may breathe only with difficulty, but for the beast itself, it’s more like a soft mattress to which it has comfortably conformed, and vice versa. Any sort of tax reform, including deduction caps, which are incremental reform, partially wipes out part of these accumulated deals among State and special interest factions. So if you want to raise revenues for the State, and leave the tissue of these deals intact, it has to be by raising rates, not imposing caps, and the more funds you want to raise, the more important this is. Raising rates in fact is good for tax expenditure dependent factions, if I may invoke that Madisonian notion.  The higher the marginal rate on income, the more relatively attractive a tax deductible donation becomes.

Columnist Robert Samuelson agrees:

As the top rate rose, so did the value of generating new tax breaks. Ironically, many of the people who complain the loudest about Washington influence-peddling and lobbying re the same people who support higher tax rates, which stimulate more influence-peddling and lobbying.

Dan Mitchell of Cato does some arithmetic on The Link Between High Taxes and Corruption,and concludes:

[L]et’s consider a couple of additional hypothetical questions.

  • First, imagine you’re a lobbyist. Do you think you will get more business if tax rates are high, or if tax rates are low?
  • Second, imagine you are a politician. Do you think you will get more campaign contributions if tax rates are high, or if tax rates are low?

The answers are obvious, and so are the implications. Yes, higher tax rates are bad for growth and competitiveness. And, yes, they are unfair and discriminatory.

But they also foment and encourage sleaze in D.C., and that’s something that honest leftists should hate as much as the rest of us.

Our ruling class, especially but not exclusively the Democratic Party, consists of a coalition of special interests whereby each supports favors for all other members of the coalition as long as it gets its place at the trough. There is no limit on the costs that any of these interests is willing to impose on society in the interests of obtaining its pork, so the amounts and the destructiveness of the levies on the society are growing steadily.

Most important, the ruling class has no real interest in tax reform or simplification. The national interest is in something approaching a flat tax — low rates with few deductions and no "targeted tax breaks" supposedly designed to carry out the whim of some politician. The interests of the political class are the exact opposite — high rates, many and complex deductions, and tax breaks for every purpose under heaven. We look more like 1780s France every day:

The rolls of the taille, capitation, vingtiêmes, and other taxes, were distributed among districts, parishes, and individuals, at the pleasure of the intendant, who could exempt, change, add, or diminish, at pleasure. Such an enormous power, constantly acting, and from which no man was free, might in the nature of things, degenerate in many cases into absolute tyranny. It must be obvious, that the friends, acquaintances, and dependents of the intendant, and of all his sub-delegués, and the friends of these friends, to a long chain of dependence, might be favoured in taxation at the expence of their miserable neighbours; and that noblemen, in favour at court, to whose protection the intendant himself would naturally look up, could find little difficulty in throwing much of the weight of their taxes on others, without a similar support. Instances, and even gross ones, have been reported to me in many parts of the kingdom, that made me shudder at the oppression to which numbers must have been condemned, by the undue favours granted to such crooked influence.

At least, in the France of two centuries ago some limit on complexity was imposed by the fact that the technology was the quill pen and parchment; there was a practical limit on the complexities that could be stuffed into the tax code. Now, the computer has shifted the balance of power to the forces of darkness, and no such limits are apparent.

It is hard to be optimistic. I put some optimistic  ideas in Ending Big SIS (The Special Interest State) and Renewing the American Republic, but that was before the election, and my sense of hope is stretched thin.

(65 Posts)

Author: "Ending 'Big SIS' (The Special Interest State) and Renewing the American Republic" (2012) [www.SpecialInterestState.org] and "Property Matters--How Property Rights Are Under Assault and Why You Should Care" (1997). Some former jobs: Assistant Director of Consumer Protection in FTC; member of the Program Analysis Staff of the US Bureau of the Budget; Research Director of the Administrative Conference of the United States; Director of IPCentral at the Progress & Freedom Foundation; VP & GC of the National Legal Center for the Public Interest. Graduate of Harvard College and Harvard Law School, former Book Review Editor of the Harvard Law Review.