With $150B+ in improved economic efficiency on the table and the potential for improved quality of life and better corporate returns, why haven’t legislators funded a study to replace income/capital taxes with consumption taxes? One justification might be that a $13.8T economy would only see a 1.1% improvement in efficiency by adopting consumption taxes. Legislators may believe that they have bigger fish to fry. On the other hand, giant economic entities, whether government or corporate, rarely get opportunities to improve efficiency by anything like 1% merely at the dash of a pen.
Another justification might be elasticity. If tax revenues were derived from consumer spending, revenues could take a hit if consumers lacked confidence in their future prospects. Governments that aren’t required to balance their budget usually print a bit more money during economic downturns. So how would that be different?
The real explanation is more likely to be soft money. Income tax credits and loopholes allow government to provide a boost to this or that special interest group by diverting revenue away from the treasury before it’s actually captured. The Internal Revenue Service is controlled by the Secretary of the Treasury, who reports directly to the President, which means that the executive branch can in a very real sense ‘fund’ special interests by exempting them from portions of their tax liability.
The point is that the legislative branch does not have a hand on the purse strings of soft money. If the federal government were to abandon income taxes in favor of a consumption tax policy, the executive branch would lose its control over soft money ’spending.’ Article 1, Section 8 of the Constitution grants the power to tax and spend to the legislative branch. We fought a war with King George over taxation without representation.
Tens of thousands of people fought and died to domesticate tax authority, yet soft money ’spending’ does an end-around the legislative branch, effectively crowning a new King, whose vast executive branch has the power to manipulate tax policy and soft money spending without a word or a wink from the legislative branch.
No president who enjoys the trappings of power is going to lobby for an end to soft money spending. Can we conclude that presidents in general are likely to veto a switch to consumption taxes because it would mean the end of their soft money authority?
Soft money is outside the legislative negotiation process, so no representative can be held accountable – blame is clearly within the executive branch. Even better than pointing fingers at the president, some civil servant deep in the bowels of the IRS is the ultimate culpable party for any unpopular ’spending’ program. The legislature gets off Scot-free and the president can rely on plausible deniability.
What were we thinking?
Needed… documentation of the size of each of the loopholes and the soft money ‘budget’. Following are a couple of significant, yet accessible sources of information on abused income tax loopholes:
America: What Went Wrong? by Donald L. Bartlett and James B. Steele. 1992, Andrews McMeel Publishing. ISBN-10: 0836270010
America: Who Really Pays the Taxes? by Donald L. Bartlett. 1994, Simon & Schuster. ISBN-10: 0671871579