TAX REFORM, LIKE BEAUTY, IS IN THE EYE OF THE BEHOLDER; NO ESCAPING POLITICS OR PERSONAL VALUES

Rick Althaus, Phd., is Associate Professor of Political Science at Southeast Missouri State University.

The main problem in recommending reform for the U.S. tax system is that reform, like beauty, is in the eye of the beholder. There is really no part of a tax structure that can be created without incorporating one's personal values and preferences into the end product. To demonstrate this point, examine the tax system from the very beginning, the way a policy analyst would.

What is the purpose of a tax? The most obvious and basic answer to this question is that the purpose of a tax is to raise revenue. This is, however, not the only possible use for a tax. From almost its very beginning our federal tax code has been used to try to achieve other goals of society.

The fact that your home mortgage interest is deductible demonstrates that at some time in the past, ~ Congress decided that home ownership was good, and therefore should be encouraged. Making contributions to charities was also seen as good, and consequently, charitable contributions were also made deductible. In other words, it has been common to use the tax code for purposes other than simply raising revenue.

The adoption of other objectives for the tax code is supremely "political" in that it involves the setting of priorities for society, and that cannot be done without adopting certain values and rejecting others. If you decide that family medical expenses should be deductible and that "three-martini" lunches should not, what you are saying is that medical care is so important that government (that is, other taxpayers) should subsidize it, but that business lunches are not as deserving. What you have just done is "politics." You have determined the values of our society.

Some people have found the federal tax code so confusing and intimidating that they have called for the elimination of all "loopholes." The problem is that one person's "loophole" is another person's "incentive.~ If the tax law permits a write-off of a certain type of investment which I have made and you have not, you will see this provision as a loophole, while I will see it as a valid expression of the values and goals of society. To most people, a "loophole" is a provision which they can't take advantage of.

Let us imagine that we can design a tax system without any loopholes (or incentives). What else should a tax be? Most Americans would respond that a tax should be "fair." Fairness, of course, is defined in different ways by different people. Some say that a "flat" tax, where everyone pays the same percentage of income in tax, is fair because it treats everyone the same. Others oppose such an idea, saying that equal treatment is not the same as equal effect. They say that such a tax imposes more pain on a less well-to-do person than on a wealthier one, because most or all of the former's net income will have to go to necessities such as food, shelter, and clothing. It is obvious that the "fairness" of a tax cannot be measured objectively, but only subjectively.

The proposed capital gains tax cut has problems from both the "loophole" perspective and the "fairness" perspective. First, it does not simplify the tax system, but rather complicates it by taxing capital gains at a different rate than that of ordinary income. Those without capital gain income may see this as a loophole, because it clearly is a way for some (but not all) to reduce their total tax bill.

Secondly, the proposal is usually criticized for its lack of "fairness." It is evident that those who would receive the greatest immediate benefit are those at the higher income levels, who are more likely to have made long-term capital investments. In rebuttal, supporters of the idea say that it will encourage investment~ which will lead to jobs, and that therefore it will also benefit (presumably, at some time in the future) those at the lower economic levels. Whether such a rationale is true will be left to the economists. Whether it is "fair" will be determined ultimately by the voters.

Notice, too, that this proposal also seems to contradict the main purpose of a tax: to raise revenue. It would actually forgo some revenue in the short term for the purpose of stimulating certain kinds of economic activity. The proposed "middle class" tax cut would do the same thing (in a different way), though it is probably more likely to be seen as "fair" by the voters. Most voters, after all, are found within the broad boundaries of the "middle class."

It is not really very realistic to expect these and other tax issues to be discussed without political rhetoric. Taxes, because they involve the central values of a society, will always involve the values and emotions of those debating them. That does not, however, preclude their being discussed more thoroughly and thoughtfully than in the frantic sound bites of an intense election campaign.

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