business & professional >> econo

NOW IS THE TIME!

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Roadblocks to tax reform.

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42

April 16 • 2015

JN

he federal tax system is anti-
quated and dysfunctional.
The tax code impedes growth,
discourages investment and is rooted
in a government that picks winners
and losers. It has become too complex
and is riddled with carve outs that dis-
criminate against productive economic
choices.
The tax code adversely
affects families and dis-
torts business' decisions.
Often tax legislation
promotes economic inef-
ficiencies, to say nothing
of its adverse impact on
income inequality.
The global economy
has changed dramatically,
but the structure of the
tax code has stayed the
same.
Despite widespread
disdain for the current tax
system, reform efforts have consistent-
ly failed. No significant tax reform has
occurred since 1986, a nearly 30-year
span covering both Republican and
Democratic congresses and presidents.
A major reason for the lack of prog-
ress is the "special interest bias" a con-
cept developed in the field of public
choice, which applies economics to the
analysis of political behavior.
A special interest (SI) exists when
the benefits of a political action are
individually substantial and highly
concentrated among a small number
of people. The costs of the action are
individually small by comparison
and are widely dispersed among a
large number of people. As a result,
the minority of voters who favor the
action will lobby far more aggressively
than the minority who oppose it.
Constituents who favor the issue feel
substantially more intense about the
issue than those who are opposed
Voters with a vested interest tend to
be better informed on SI issues than
most other voters, and their cost of
acquiring information is comparatively
low. Their regular activities and the
knowledge of those with whom they
associate will often, as a by-product,
produce political knowledge related to
their vested interest. Candidates who
support the views of the SI have an
incentive to provide this information
to those with intense feelings while

withholding this same information
from the general population.
One way to increase the cost of
information to voters is by increas-
ing the complexity of a proposal. If a
proposal is complex, it is more difficult
for average voters to determine its per-
sonal impact.
Moreover, voters with no
ties to a particular special
interest have little incentive
to find out where a candidate
stands on that issue because
it exerts little influence on
their personal welfare. A voter
must choose among candi-
dates who represent a "bundle
of political goods:' Candidate
positions on other issues of
greater political importance
will overwhelm the impor-
tance of the SI issue.
Because the disinterested
and uniformed majority is
less likely than the vested interest to
consider a legislator's position on a
given SI issue, there is a strong incen-
tive for the legislator to support the SI.
This incentive is increased if sub-
stantial campaign contributions can
be solicited from the SI at a low cost.
Funds obtained from the vested inter-
est constituency can in turn be used
in a more general appeal stressing the
candidate's views on important issues
where his position is favored by most
voters and promoting those charac-
teristics that are thought to positively
influence election prospects, indepen-
dent of his position on issues.
Special interests wield consider-
able influence on tax reform issues.
Tax-free income on municipal bonds,
investment tax credit, accelerated
depreciation, mortgage interest deduc-
tion and a host of special subsidies
benefit special interest groups, while
imposing less noticeable costs on most
others.
The road to meaningful tax reform
will be open when legislators no longer
reap political benefits from a system
that enables them to reward few at the
expense of many.

❑

Jonathan Silberman is a professor of eco-

nomics at Oakland University. He writes a

monthly column on the economy for the

JN. You can contact him at silberma®

oakland.edu.