Friday, July 29, 2005

Complex Complexity

There have now been a number of additional postings on the "Is the tax code too complex" debate. See Joe Kristan here, Jim Maule here and here, and Kreig Mitchell here. It strikes me that there are really two different threads in the debate.

The first is the thread that I initially thought Jim Maule was following, namely, that the Code is so badly drafted that it's simply impenetrable. (Or, at least impenetrable for practical purposes, since the effort to decipher certain provisions is disproportionate to the resulting economic product.) I defended the honor of the drafters of the Code by pointing out the various burdens that they had to shoulder in the drafting process (political pressures for exceptions to general rules, the fact that the Code was written by a large "committee" over a period of years, etc.). Nevertheless, having looked into the abyss of the Code more than once until I found it staring back at me, I have a good deal of sympathy for Jim's position.

Joe Kristan takes another tack. He argues:
The tax code is asked to accomplish way too much. If the Code was used simply to raise the revenue necessary to fund government operations, it would be much simpler. But revenue-raising is the least of it nowadays.
Here, I find myself closer to Kreig Mitchell's corner. There is no way any tax mechanism can be "used simply to raise . . . revenue." Once there is a tax on something, anything, there is going to be a degree of distortion in the market. But once there is a decision to levy taxes (which, as Justice Holmes recognized, went hand-in-hand with the "decision" to forge ahead with civilization), the free market was no longer pure. The question is never "Does this tax (or tax break) affect market forces," because all taxes (and tax breaks) do so. The question should be "How does this tax (or tax break) affect the market and is that affect beneficial?"

Of course, having said that, it is also true that we perhaps ask too much of the tax system. In many cases, there are other, more focused and direct, ways to encourage or discourage various policies. However, a lack of focus may itself be a policy choice. Take charitable deductions for instance.

Those deductions finance your church and my synagogue. They finance my sons' Big State University and small liberal arts colleges. Lord only knows how many small and eclectic museums, arts councils, and theatre groups receive indirect subsidies through these provisions. What if we chose instead to take away the indirect subsidy with the expectation that direct government subsidies would take up the slack. Would it be the same? Of course not.

If we had to rely solely on government funding, the offerings would be made bland. By funding these community activities via the tax code, we end up with a substantially more heterdox and interesting culture.

One could argue, for instance, that the tax subsidy that flows to support private home ownership is socially wasteful. However, one should not argue that the tax code is to blame. The basic decision to encourage private home ownership is either correct or it's not. The tax code is merely the vehicle through which the decision is made operational.

What should be recognized, however, is that the tax code is a blunt tool. It cannot easily be used to effect subtle policy goals. And, the more we ask of the Code, the more complex and difficult to understand it becomes. At some point, of course, far from Kristan's fantasy of a "pure" tax code, the complexity does cause the system to bog down simply because the effort that has to be spent on compliance becomes Herculean. As is the case with much social policy, the answer to the question of whether a particular tax burden or break is beneficial is as much subjective as it is objective.


Joe Kristan said...

Hey, what's wrong with fantasy?

I have no illusions that there will ever be a "pure" tax code (sigh). But there is far too little recognition that the tax law is, as you say, a "blunt instrument" of policy. The more micro policies you run through the code, the more you undermine code compliance and enforcement -- weakening the very ability of the tax law to do all you ask of it. You quickly reach a point where the cost of complexity exceeds the benefits of any given micro policy.

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