The tough road to sensible taxes

February 1, 2012

President Barack Obama thinks taxes can help the government achieve a precise policy objective. In last week’s State of the Union address he outlined a complex set of tax adjustments  to discourage companies from moving American jobs to foreign parts.  In the same speech, Obama also suggested that taxes can be made simple and clear:  “No side issues.  No drama”, he said. He applied that description to the extension of the cut in the U.S. payroll tax rate. It was followed by pushing for “common sense” on a minimum tax rate for the rich. “Washington should stop subsidizing millionaires”, the president said.

The rhetoric may not be entirely contradictory, but it points in quite different directions. If the tax code is written to reflect particular concerns, whether of the government or of influential taxpayers (and non-payers), it will never be simple. And if simplicity is the guiding principle, it is hard to understand why the president wants to add to a U.S. law which already has 9834 sections. 

The current president is not the first person to dream of improving a complex, arbitrary, inefficient and unjust tax system. On the contrary, the history of taxes in every country is replete with efforts at reform, although they come along far less often than desperate measures to squeeze more money out of unwilling subjects. Governments’ consistent need for more revenue and the governed’s equally consistent reluctance to pay helps explain why reformers find progress so difficult.

Obama’s inability to support simple tax principles for even the length of a single speech suggests another reason: irresistible temptation. Politicians love to give favours, to redress particular wrongs, to promote special rights. Obama and other would-be tax-reformers are more likely to succeed if they base their proposals on principles which are both idealistic and pragmatic.

First, the primary goal of tax systems should be justice. In one sense, that’s obvious; injustice has few defenders. But in discussion of taxes, justice is often sacrificed for expediency or the pursuit of efficiency.  This results in exemptions for important cases or special measures that promote  good causes — say home ownership or American jobs.

How does this fit with the principle of tax justice? In our social market economies, taxes should primarily serve the social side of the system. A just tax system will follow what Pope Benedict XVI called the “logic of public obligation”. He says that the compulsion of the law should be used to support the social fabric by making people do what they would want to do voluntarily — if they were perfectly good. Taxes should help but not pamper the poor and discipline but not break the rich.

This principle of justice will not end all arguments about tax policy. It can be used to argue for flat or rising tax rates; for levying taxes predominantly on wages or on prices; and for countless other arrangements. But if those who write the tax rules keep to this principle, the tax system is more likely to be just.

A second goal of tax systems should be to prefer imperfection to complexity. In this convoluted world, even a basically fair tax system will be unjust to some people. But additional rules designed to help the maltreated almost inevitably have unintended consequences. A common effect is the creation of loopholes through which the privileged quickly move, managing to pay less tax than they would otherwise. If a Save American Jobs tax benefit becomes law, companies will undoubtedly go through contortions to show they qualify. Obama would be more likely to do good if he dropped his own tax contortions to focus on simplicity. 

Third, taxes should not be used to guide social policy. Taxes are too crude and indirect to be effective for that. If bosses are paid too much, it is better to pay them less than to tax them more. If ordinary wages are too low to support families, raise the pay rather than cut the taxes. If governments want to subsidise investment, culture or some other public good, they should do so with grants rather than tax breaks.

Fourth, vigilance. From the tax exemptions of monasteries in medieval Europe and 11th century China to the “carried interest” of today’s private equity managers, the powerful have always twisted tax rules to their advantage. They should be held in check. More pertinently, since lawmakers are usually representatives of the elite, they should hold themselves in check.

In that respect, President Obama deserves praise for admitting that it’s “not right” when “I get a tax break I don’t need”. If his Democratic followers and Republican opponents showed some of the same humility, a better U.S. tax system might become more than an idle dream.


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U.S. tax law is the best defense against immigration. But it is selective in a way that is most unhelpful to the United States…
Anyone intelligent enough to know how far they fall short of understanding the U.S. tax code would be most reluctant to make themselves subject to it!

“a Save American Jobs tax benefit”… This in itself is a convoluted effort to sidestep the political issues of the WTO. It’s nothing more than a generalised, unfocused countervailing tariff under a different name.

One word for Pope Benedict XVI. I’m probably still a long way from being “perfectly good”, but I don’t need to be forced to pay my taxes: even a very sinful man can muster an honest tax without having his hand forced, and having the opportunity for exercising moral courage taken away from him! I pay taxes honestly and willingly. While paying slightly more tax than I’m supposed to, it’s satisfying knowing I haven’t stretched any definitions or retrospectively reclassified any transactions to qualify for deductions that wouldn’t apply under the original intent of the law.

> “If bosses are paid too much, it is better to pay them less than to tax them more. If ordinary wages are too low to support families, raise the pay rather than cut the taxes.”
– Excellent points – it’s too easy to get hedged up in the Republicans’ favorite debate about taxation, but looking at taxation without seriously examining wages gives an inherent and unfair advantage to Republican propaganda, as it allows them to dishonestly reduce the debate to,
“Republicans want lower taxes, whereas the Democrats want higher taxes…”
I must partially dissent from your view here that taxes are “too crude and indirect to be effective for that”… Taxation CAN effectively increase the relative competitiveness of companies with a more equitable wage culture. But I do agree that what REALLY needs to change is the CULTURE. Give us more complete wage transparency, including ALL directors on personal line-items, and histograms & aggregate statistics of the other staff members (subdivided into types and skill-grades of work). Force all companies to publish these figures, free of charge, to all workers and their unions. And bring back a sense of shame for those taking more than their fair share, by “virtue” of being in control of the purse-strings, or by “virtue” of having secret knowledge about how the system works…

Let’s have the Social Market (the German model) that you mentioned in a previous post! Why is Germany succeeding while laissez-faire “free markets” sink into the abyss? Just look at the relative culture of equality and meritocracy amongst the “Mitarbeitern” of German cottage industries and industrial giants, and compare that to what we have in the UK or USA now… Just look at German fiscal balance, which favours both employment/ manufacturing & export, and the purchasing power of German citizens: they strike the perfect balance. Compare that with the short-term, casino capitalism, “strong dollar policy” and accompanying propaganda that we get force-fed in the West.

Posted by matthewslyman | Report as abusive

I just realised… I’m suggesting for companies to be forced to do something that is radically different from present-day culture, whilst protesting for the right to voluntarily “do the right thing”. Perhaps my position is justified by present circumstance [yawning gaps between information-rich cash-rich and information-poor, cash-poor, almost chronically abused workers]… But on second thoughts, perhaps it would be better instead, to kickstart this revolution with a voluntary “code of good practice”, or, with an effort similar to Warren Buffett’s and Bill Gates’s good work with their “giving pledge”? Give people the chance, from the outset, to exercise moral courage and do the right thing voluntarily?

Posted by matthewslyman | Report as abusive

I’d quibble that no flat tax can ever be just. Taxing someone who makes $10,000 a year at 20% is very different than taxing at 20% someone who makes a million a year. The former suffers far more than the latter, for no socially useful purpose.

My simple tax would be to set up brackets based on income level, maybe 5-6 levels, with only a few giveaways like the mortgage deduction (but only on the theory that creating stable communities is worth the deduction). And I would tax the top group at 100%, maybe dollars above $20 million earned in a year.

Ultimately, however, the problem with your piece is that it is sensible and rational about a debate that is neither.

And any broad political consensus appears absent at the moment. If you talk reforming corporate taxes, for example, the Republicans will insist on 1% or maybe 5%. Given that businesses cannot exist without taxpayer subsidized infrastructure like roads, bridges, court houses to enforce legal contracts, any tax less than 15% (?) probably is too low.

Posted by FredFlintstone | Report as abusive

No one has “perfect vision” when it comes to improving complex systems with obvious flaws. I believe the medical caution would be appropriate here: “First, do no harm”.

Clearly any tax system should be “just”, but that is NOT it’s primary goal. The primary goal is always sufficient tax revenue to appropriately fund the needs of the government administering a given society.

It may be that once upon a time the people of this great nation were of such common mind that government “needs” did not need detailed analysis and further definition. Indeed, they did not until the twentieth century and increasing complexity posed by citizens of increasing number, literacy, “diversity of origins” and personal expectation.

From that time an increasingly rich and successful nation took upon itself the tasks of righting the wrongs that everyday life inflicts unequally. Our path since has been much like blazing a path through virgin forest whose ultimate destination is unknown, other than in the most idealistic and abstract terms. When it comes to justice, simplicity and efficiency in a tax system, many decisions must be made on the basis of “pick any two” because of inherent conflicts. The going has not been easy or steady. Why are we surprised? We are economic explorers!

The tax advantages created to advance the abstract ideal of universal home ownership illustrate well the law of unintended consequences. This caused expansion in the construction industry that would not have otherwise occurred, the explosion of the basic home into McMansions, and rampant real estate speculation based on the false premise that homes always appreciate everywhere. When these three legs of our economic stool collapsed, so did much of our existing financial system.

That system lives on, largely on the life support of Washington printing-press dollars. It’s culture remains substantially intact, unrepentant and unregulated. What we have seen in action is unrestrained incompetency in our government and our markets. It was NOT capitalism or a failure of capitalism . Indeed, we remain at undiminished risk of “same song, second verse” in the future if heads do not roll and jail cells close.

I disagree with the very suggestion that America is, or should be, a “social market economy”. The symbol of America is the eagle, not the sponge. Humans are much more predictably “hard wired” than governments or economies. It is incentive, the desire to improve our individual circumstance and that of our families, that is the universal and inexhaustible power capitalism harnesses.

You cannot utilize expectations or entitlements to drive an economy no matter how carefully you tailor the harness. It is no more possible to “make” people do what they would want to do voluntarily — if they were perfectly good that it is to accomplish something useful by pushing a rope or a chain. People cannot be compelled to do more than the absolute minimum. It is inspiration and leadership that make ordinary people capable of great things.

It is in our individual DNA to help those who help themselves. It need not be in our tax code, and taxes should not be used to guide social policy. We are, collectively the most generous nation this world has ever seen in times of need and disaster. Those who would exploit or enslave us have not fared well in history.

On the other hand, tax incentives and penalties are incredibly accurate and appropriate to guide commercial conduct to encourage or advance the adopted goals of our society. Ethics and conflict of interest constraints should assure that Boards of Directors are not control or materially influenced in setting executive pay. Given established salaries for our President and Congressional representatives and respective responsibilities, it may be time for our society to cap executive pay in the conspicuous absence of meaningful self restraint.

What workers are paid is properly determined initially by the law of supply and demand and ultimately by what each contributes to a company or department’s success, however measured. We are a meritocracy. Such decisions should NEVER be made by government fiat. Governments are not smart enough or flexible to “get it right” and “keep it right”. Only the dynamics of the marketplace can do that well over time.

It is a core government responsibility to it’s citizens that all have an opportunity to succeed. The education process should be an effective one such that all who successfully complete a chosen course of study leave with sufficient and appropriate skills, and that their numbers are not inconsistent with the needs of the businesses responsible for creating a given society’s wealth or within the proper functioning of said government. Those who stare out the window or otherwise waste their individual opportunities or drop out will have made a choice and choices have consequences, both good and bad. America owes no one success that is not earned.

The “trouble” with government grants to subsidize culture or some other public good is that grant money must be first taken from taxpayers. Far better to instead have society reach consensus as to, first, what they NEED government to do; and then what they would LIKE it to do if money is available.

Since ONLY those who produce and then pay taxes create “government wealth”, those ONLY should have a say in how it is spent. That virtually assures that government’s legitimate role will be limited to NEEDS and priorities, while people will individually decide the priority of their WANTS.

I’m not saying that the accomplishment of these steps in proper sequence is easy, but only that I see no honest good faith alternate plan with as much “going for it”.

Posted by OneOfTheSheep | Report as abusive