Politicians shouldn't write tax policy

There's broad agreement on how to tax; representatives should focus on spending.

In my post on tariffs, I suggested that you can take away politicians’ ability to set tariffs without limiting their options much, since they can just use subsidies. Subsidies are much more transparent since voters don’t need to understand tax economics to figure out how the policy affects people; just look at who’s getting money.

I think we can further constrain politicians to improve governance by taking away the ability to set tax policy.

The problem is the same as with tariffs in that basically nobody knows tax economics. It combines two boring subjects into one of the most boring subjects ever. Unfortunately for you, we’re gonna need to review this stuff before we go any further.

Opinionated review of tax policy

Taxation has existed for a long time, so we know a lot about how to raise taxes. We also have a good understanding of what makes a tax system economically efficient, equitable, and effective at raising revenue.

Here’s a brief summary:

1. Virtually all taxes destroy value on net, this is called deadweight loss. You can counteract some of that loss by spending effectively on public goods, but this is hard to do in practice.

2. Some taxes have a positive value, or at the very least, have no deadweight loss. We’ll discuss this later.

3. The ideal tax is inexpensive for the state to collect, unintrusive for citizens, roughly tracks ability-to-pay, is hard to avoid, and doesn’t distort behavior much.

4. Ideal tax policy is clear enough that citizens know what they will pay and is consistent enough that people don’t suffer from frequent, unexpected changes.

5. People will do everything in their power to avoid taxes. They are smarter and more motivated than the authorities collecting taxes.

6. Taxes are very unpopular politically, particularly if they’re seen as unfair. Tax systems must be tolerable to citizens if they are going to stand the test of time.

7. Taxation is quite challenging in practice and states with little state capacity may not be able to implement a sophisticated tax system.

There’s actually an incredible amount of agreement about tax policy amongst economists and policymakers. For one, everyone agrees that you should tax negative externalities (and subsidize positive ones)¹. And economists across the political spectrum like land value taxes; find me another tax that Milton Friedman and Karl Marx agreed upon²!

These ideal taxes don’t generate enough revenue to fund a modern state. To fill the gap, most people support a grab bag of imperfect taxes that generate lots of revenue and are straightforward to administer. Income tax, value-added tax (VAT), seigniorage, and property taxes are approximately fine at low tax rates.

Then there’s all the taxes that every serious person knows are harmful such as corporate income tax, capital gains tax, tariffs, tax loopholes, and the like. There’s no need to rely on these sorts of taxation when we have perfectly good options for generating revenue³⁴.

So if we have taxes that are reasonably efficient, are feasible to collect, raise sufficient revenue, tolerable, and progressive, why does congress need to make changes every year?

Source

An independent tax authority

Tax policy has a big influence on the economy and subjecting it to the whims of politics has damaging consequences for long term growth. Special interest groups can insert tax loopholes that make the law more complicated, contributing to tax evasion and rot. Shifting political power means that tax laws are constantly changing; parties in power can implement frivolous taxes to score political points, and worse, tax authorities can be weaponized against political enemies, curtailing civil rights.

Our tax policy would be far better in the hands of an independent authority. This wouldn’t be the first time that we’ve had to isolate some of our economic policy from political influence; the U.S. has an independent federal reserve that manages macroeconomic policy. If politicians had power over the fed, they would pursue short-sighted strategies to help them get reelected at the expense of the long term growth, impoverishing everyone.

What would this revenue authority do? Well for one, it would collect taxes like an independent version of the IRS. Its budget would come directly out of tax revenues and it would have the freedom to hire as needed⁵. More importantly, the tax authority would be tasked with setting tax rates, communicating tax policy, getting feedback from citizens, and the like.

The revenue authority will have to balance between providing the government with sufficient revenue to function while also bolstering growth. This is challenging, but fortunately, the evidence is pretty clear about the right ways to raise revenue while maintaining the economy⁶.

This isn’t as big of a change as it might first appear, since much of our regulatory system has already been outsourced to government agencies. Taxes themselves are already collected semi-autonomously by the IRS.

With a tax agency protected from the chaos of politics, there’s many opportunities for reform. Rather than making you file taxes each year, the IRS could just send you an itemized bill. Rather than target welfare, make it easy for anyone to pick up a check from the government and apply taxes after-the-fact. And in the U.S., politically impossible ideas like the VAT could actually get implemented.

But wait, if tax collection and tax policy are conducted by an independent authority, what’s left for congress to do? For one, they will continue to craft legislation on topics unrelated to taxation. But a far larger role will be to determine how to spend the trillions of dollars of revenue the tax authority collects each year⁷. That sounds a lot more fun than bickering over tax rates.

War

Didn’t think this was going to come up in a discussion about tax policy did you? But war and taxation are siblings, taxes have been used throughout history to fund conquest.

In times of war, the state needs additional funding. Taxes during this period will be higher than is optimal and policy is dictated by the needs of the war effort⁸. In this case, there should be some mechanism for congress to temporarily control the amount of revenue that the tax authority targets.

I think the simplest solution is to grant congress the ability to set revenue targets so long as it has declared war. Declarations of war should require renewal on a regular basis to prevent congress from holding on to power. It’s a little risky giving a political body the opportunity to increase it’s own power, but I think there are checks that can be put in place to prevent this from being abused.

Conclusion

Putting tax collection and tax policy in the hands of an independent authority similar to the Fed would dramatically improve public administration. Since it’s tasked with protecting long term growth, tax policy will be clear, stable, and efficient. With more autonomy, the IRS will have the tools to collect taxes effectively and citizens will be protected from politicians who might abuse the tax system for their own gain⁹. As a result, people can expect a far better economy, responsibly managed national debt, transparent taxes, and lower inequality.

Taxes would no longer be under the purview of politicians, and by extension, voters. This is somewhat undemocratic, but I think it’s worth the price. We don’t put monetary policy under democratic control because the economy would be in shambles and tax policy should be the same.

With taxes off their hands, politicians can focus on spending the tax revenue, investing in all manner of social programs, subsidies, and research projects that advance the public good.

EDIT: I fixed some of the wording after this post auto-published.

EDIT: I just found out about the Mirrlees Review (wikipedia) a 2000 page report from a bunch of economists about how to reform the UK’s tax system. You guessed it, they recommend land value tax, taxing negative externalities, income taxes packaged in a simplified tax code.

1. Wonks also like destination based cash flow taxation.

2. People interpret Marx’s letter on Georgism as being dismissive of George’s ideas, but a careful reading indicates that Marx liked the idea of land value taxes as a step towards more radical changes. He said “You will find payment of this kind among the transitional measures included in The Communist Manifesto too” and “We ourselves, as I have already mentioned, adopted this appropriation of ground rent by the state among numerous other transitional measures …”. He takes issue with George and other agrarian socialists because their ideas leave capitalism intact: “The whole thing is therefore simply an attempt, decked out with socialism, to save capitalist domination and indeed to establish it afresh on an even wider basis than its present one.” Marx took issue with capitalism as a whole, not land value tax!

3. You can make arguments that the optimal rate for some of these taxes is non-zero under different models. Taxation and national defense is a good example. I find a lot of this debate academic, these models are often extremely sensitive to the assumptions. The taxes I’ve highlighted above are far more robust. We have simple tax systems that work, there’s no need for additional complications.

4. Some of these taxes are justified on the basis of addressing income inequality, but there are plenty of ways to implement progressive taxation and redistribution that are far more efficient.

5. I’ve seen this called a “semi-autonomous revenue authority”.

6. It’s interesting to consider what incentive system would encourage a revenue authority to prioritize long term growth. Stock investments that can’t be cashed out for a decade? Treasury bills? Derivatives based on projections of future median income?

7. It’s not clear to me who should get to set the overall budget. With congress in control, we overspend and overtax. But giving budget control to the tax authority might give it too much power. A compromise could involve congress sending a budget to the revenue authority with the authority having the ability to make adjustments to the total.

8. Ideally the state would save some amount of money save in preparation for a war and get some support or insurance from their neighbors as well.

9. Would an independent tax authority be susceptible to regulatory capture? Perhaps, but no more than congress is today. Adding incentives for long-term growth should ameliorate the effects of lobbying.