Keep it limited and keep it simple

The first and second rules of good government

The price of liberty is eternal vigilance. We can never remind ourselves of this fact too often. As I have written many times, government by its very nature is a slippery slope. We need government and we need good and efficient government for a number of things that only governments can provide. But it is in the very nature of government that it naturally expands its scope and power unless prevented from doing so – over and over again. It is also in its very nature that it is relatively inefficient and slow moving because of the need for cumbersome checks and balances. Private enterprises are disciplined by the market (their need to profitably satisfy consumers). Governments are more difficult to monitor and keep honest. But we need them so some (hopefully limited and enumerated things) are properly assigned to government.

Government is especially difficult to keep in check the more it intrudes into activities in and of the private sector. This is a good reason for resisting such extensions in the first place. The repeated cycles of corrupting our tax code with special breaks for special groups provides but one example of the danger. After pretty much cleaning up the income tax in 1986, special interest favors gradually crept back in until now it is again a total mess. Economists continue to debate the best approach to taxation (see my summary: The-principles-of-tax-reform in the Cayman Financial Review July 2013), but they are generally agreed that a broad tax base with low or flat marginal rates is the most neutral (least distorting of the economy), efficient, and fair way to raise the money to pay for what the government does. In short, special tax brakes for specially groups are generally bad (watch a few episodes of the Netflex series House of Cards to get a feel for the problem).

I was brought back to this topic by a recent Washington Post article on proposals by Senator Ron Wyden, the new Chairman of the Senate Finance Committee to restore all kinds of special favors to the tax code, basically ignoring the recent, laudable efforts of the House Ways and Means Committee, lead by Representative David Camp, to remove them and clean up our scandalous income tax law. “Senator to revive array of tax breaks”/2014/03/26/. Once a favor (tax break or subsidy) is extended to a special interest group it has a much stronger interest in defending it than the rest of us (the general tax payers) have in fighting it to take it away.

A few of Wydern’s proposals tell you all you need to know (once again, think House of Cards): “Sen. Ron Wyden (D-Ore.) plans Monday to unveil a proposal to temporarily extend the breaks, which include such popular policies as a credit for corporate research and development, an incentive for commuters who use mass transit and a special deduction for sales tax in states such as Florida and Texas, which do not tax income.

“Democratic aides said Wyden plans to ask the committee to vote separately on some of the more controversial provisions. For instance, senators will be asked whether to revive a much-maligned break to promote development at NASCAR racetracks, as well as a credit for the purchase of electric motorcycles and golf carts that barely survived a 2012 effort to weed out special-interest provisions.

“However, Democratic aides expect the entire list of temporary tax policies — known as “tax extenders” — to emerge intact from the committee, adding nearly $50 billion to this year’s budget deficit.”

About wcoats

I specialize in advising central banks on monetary policy and the development of the capacity to formulate and implement monetary policy.  I joined the International Monetary Fund in 1975 from which I retired in 2003 as Assistant Director of the Monetary and Financial Systems Department. While at the IMF I led or participated in missions to the central banks of over twenty countries (including Afghanistan, Bosnia, Croatia, Egypt, Iraq, Israel, Kazakhstan, Kenya, Kosovo, Kyrgystan, Moldova, Serbia, Turkey, West Bank and Gaza Strip, and Zimbabwe) and was seconded as a visiting economist to the Board of Governors of the Federal Reserve System (1979-80), and to the World Bank's World Development Report team in 1989.  After retirement from the IMF I was a member of the Board of the Cayman Islands Monetary Authority from 2003-10 and of the editorial board of the Cayman Financial Review from 2010-2017.  Prior to joining the IMF I was Assistant Prof of Economics at UVa from 1970-75.  I am currently a fellow of Johns Hopkins Krieger School of Arts and Sciences, Institute for Applied Economics, Global Health, and the Study of Business Enterprise.  In March 2019 Central Banking Journal awarded me for my “Outstanding Contribution for Capacity Building.”  My most recent book is One Currency for Bosnia: Creating the Central Bank of Bosnia and Herzegovina. I have a BA in Economics from the UC Berkeley and a PhD in Economics from the University of Chicago. My dissertation committee was chaired by Milton Friedman and included Robert J. Gordon.
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