Tax Analysts Blog

Milton Friedman Didn't Believe in Tax Reform

Posted on Jul 2, 2013

You have to admire the impulse. Max Baucus and Orrin Hatch don’t like the tax system and they want a fresh start. Who can blame them? After all, why should we assume that existing tax incentives are worth keeping? Shifting the burden of proof to those seeking a tax break seems only reasonable.

But it’s also unprecedented. The “blank slate” approach resembles none of the successful reform efforts of the past 100 years. In fact, it’s more akin to tax replacement schemes like the Fair Tax than it is to traditional tax reform. Its wholesale rejection of the status quo is almost radical.

Or it would be if honestly and diligently pursued. But it’s hard not to be cynical.

In 1986, Milton Friedman crystallized the cynic’s case against “blank slate” reform. Lawmakers had been selling tax preferences for decades, he wrote in the Wall Street Journal. In particular, they had learned to trade loopholes for campaign contributions.

But after many happy years of pedaling preferences, lawmakers had encountered a problem. "The tax space was overcrowded with loopholes,” Friedman explained. “There was no room to add any more without destroying the tax base altogether.”

Tax reform to the rescue! By wiping the slate clean, radical reform would allow politicians to restock their inventory of saleable loopholes. Friedman especially admired Sen. Bob Packwood’s dramatic plan to slash both rates and loopholes across the board.

    Whether he realized it or not, Sen. Packwood’s approach was an ingenious solution to the potential collapse of tax reform as a source of campaign funds. His bill disappoints almost all the tax lobbyists in one fell swoop, but it also wipes the slate clean, thereby providing space for the tax reform cycle to start over again.

And of course, Packwood's plan didn’t really disappoint lobbyists, anyway, since paid advocates bill by the hour. Tax reform promised to be a win-win for the only important players in the policy process: lawmakers and the lobbyists who used to work for them.

Ultimately, Friedman's view is too cynical, even for me. I don’t think Baucus and Hatch are trying to collect campaign funds, or even ensure the full employment of their lobbyist pals and former protégés. But I do think there’s more than a grain of truth to the Friedman analysis. It may not explain legislative intentions very well, but it does a fair job of describing results.

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