The Impossible Dream

Megan McArdle’s analysis of tax burdens in The Atlantic business blog offers a nice dose of common sense, which has largely been missing from the ritual grumbling over Tax Day. She notes that, while the Social Security and Medicare payroll taxes are regressive, the working poor are largely exempt from the impact thanks to the Earned Income Tax Credit. And while the distribution of income inequality has grown in America, so has the portion of taxes paid by the very wealthy. The real losers in the system are upper-middle (low-six-figure) income households, who pay top marginal rates and are conned out of their deductions by the Alternative Minimum Tax. And even here, the definition of “loser” is relative: if Congress really did deliver even a fraction of the Medicare services it is currently promising, today’s middle-aged workers will reap a benefit bonanza when they retire.

Our major beef with the tax system is the one everybody pays lip service to and nobody (except a few lonely economists) really cares about: efficiency. Yes, marginal tax rates are relatively low for most earners. But the code is riddled with endless exceptions and traps (just try to figure out in advance whether you owe the aforementioned Alternative Minimum Tax). Some of the rich pay a lot less tax than others (think hedge fund managers, who transform the lead of ordinary income into capital gains gold). And the paperwork burden – especially on the self-employed – would make a Bulgarian bureaucrat blush.

Once upon a time, tax reform was possible. Back in 1985, Congressional Democrats joined forces with President Reagan for one magic moment to trump the lobbyists. (The lobbyists, of course, immediately went to work undermining the law, and with great success). But the amount of money that could be mobilized today to block a similar initiative is of a different order of magnitude. Our guess is that tax reform is no more possible than medical care cost control. Indeed, the only good opportunity for big changes may come with a medical-cost-driven budget crisis in which Congress is forced to consider every possible way of reducing the deficit.