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1 Murry L. Weidenbaum, Expenditure Control: The True Road to Tax Reform [i] (1985)

handle is hein.tera/expeoluer0001 and id is 1 raw text is: TAX FOUNDATION, INCORPORATED C IAT REPORT WASHINGTON, DC 20005 ONE THOMAS CIRCLE, N.W., SUITE 500 S EI AL REPORT TELEPHONE (202) 822-9050 Expenditure Control: The True Road to Tax Reform By Murray L. Weidenbaum Director, Center for the Study of American Business Washington University, St. Louis, Missouri This morning, I can sympathize with Daniel when lie was in the lion's den. Here I am at the annual meeting of the Tax Foundation and my task is to urge one and all to shift attention away from tax reform. Nevertheless, I do believe that the rush to enact yet another mjor change in the Federal tax system-the fourth in five years-is misguided; the cart is before the horse. The horse, of course, is the sticky issue that refuses to go away: how to reduce the awesome gap between the Federal government's income and its outgo. Unfortunately, most advocates of tax reform run out of time or rather, steam, before they get around to tackling this tough question. Broadening the Tax Base Let me emphasize that merely maintaining revenue neu- trality under a flatter tax structure is no easy matter. It is not an esoteric exercise in identifying and closing technical loopholes discovered by tax attorneys and accountants. Broadening the tax base involves choosing among substan- tive but basically unpleasant alternatives. Suggestions that are being seriously considered include limiting the amount of personal interest and taxes that can be deducted from taxable income; taxing items not now taxable, such as employer-paid fringe benefits; and taxing all transfer payments, such as social security and unemployment compensation. To econo- mists and business executives, these may be desirable moves to a more efficient tax system. But to politicians, the idea of removing incentives to personal consumption (and hence disincentives to saving) is translated into very different lan- guage: each of these base-broadening suggestions arouses the wrath of large groups of voters. In this light, it is interesting to examine the three flatter tax proposals that are now receiving the most attention-the In effect, the choice the Congress will face in broadening the tax base will be between politically unpopular moves that reduce consumption and economically undesirable changes that reduce investment and economic growth' Treasury proposal, the FAIR tax suggested by Senator Bill Bradley (D-NJ) and Congressman Richard Gephardt (D- MO), and the FAST tax developed by Congressman Jack Kemp (R-NY) and Senator Bob Kasten (R-WI). All three would eliminate that key incentive for economic growth, the investment tax credit, and in other ways discourage capital formation. The result would be a weaker economy and higher levels of unenployment than would result from keeping the existing tax system. Tax Reform Dilemma In effect, the choice the Congress will face in broadening the tax base will be between politically unpopular moves that reduce consumption and economically undesirable changes that reduce investment and economic growth. Thus, the dilemma faced by the proponents of tax reform is serious, but it can be dealt with in a constructive manner. Nor do we have to choose between reducing the deficit and reforming the tax code. But we have to do something else, and do it first. The solution to the tax reform dilemma lies in stepping back and looking at the entire budget. When we do that, it is apparent that the pressure to raise Federal revenue-which so bedevils all tax reformers-arises from the continued rapid growth of Federal spending. It may sound like the long way around Robin Hood's barn, but the essential first step toward tax reform is to gain control over Federal spending. Surely, a great deal has been accomplished in the past four years in slowing down the growth of social welfare programs. However, that entire effort-important as it is-has been offset by the acceleration in defense spending, farm sub- sidies, and interest payments. Simultaneously, the growth of entitlement outlays has continued unabated. As an aside, I still bristle over the current use of the term entitlement to describe Federal income transfer payments. I am old fashioned enough to recognize only the entitle- ment described in the Scriptures, By the sweat of thy brow Pruning the Budget In any event, every comprehensive examination of the spending patterns of the Federal government reveals an array of waste, inefficiency, and low-priority and postponable ex- penditures. That point has been made by an impressive variety of organizations-the Congressional Budget Office, the Gener',l Accounting Office, the Heritage Foundation, and the Gjace :2ommission. I would add, from my own personal participation in the budget review process, that candidates for budget cuts exist in every Federal department and agency, without exception. Let me provide some supporting detail for that position. I will be drawing on the work of the organizations just men- tioned, as well as the research of our Center for the Study of American Business at Washington University. I take as my inspiration the old motto of the budget office, Good budgeting is the uniform distribution of dissatisfac- Copyright 1985 by Tax Foundation, Incorporated, One Thomas Circle, N.W., Suite 500, Washington, D.C. 20005 • (202) 822-9050

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