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SELECTION BIAS

July 03, 2008

Howard Gleckman at TaxVox asks, "Does Business Really Want Low Tax Rates?":

Not only has John McCain promised to cut the top corporate rate from 35% to 25% but, now, Barack Obama is hinting that he too might trim rates in exchange for closing loopholes.

That is a deal I would make in a minute. It makes a lot of sense to keep the Code as far away from investment decisions as possible, so, for example, companies don’t do debt financing merely because the tax payoff is bigger. But I am not sure the supposed beneficiaries of these rate cuts agree.

I had lunch with a long-time business lobbyist (iced tea, no martinis) the day the Journal editorial ran and his response to this offer was, in effect, “Thanks, but no thanks.” The members of his trade association are very happy with their credits and deductions--complex as they may be—and are not remotely interested in swapping them for lower rates.

This strikes me as selection bias. Of course a lobbyist isn't going to want to get rid of targeted tax breaks in exchange for a broader base. His job is to carve loopholes, and lower rates by definition make his loopholes less valuable. If he has been a successful lobbyist, his clients won't want to change either; their lobbyist has done such a good job screwing the rest of us on their behalf that fairness would only hurt them.

Mr. Gleckman highlights an important point about tax legislation -- the "public choice" problem. There will always be a highly-motivated and well-financed lobby for special tax breaks, and there is no comparable lobby for the rest of us. The Internal Revenue Code is chock-full of special breaks (ethanol, anyone?). Iowa's tax law is the same way, as the recent Microsoft and Google bribes illustrate.

That doesn't mean that tax reform resulting in lower rates and a broader base is impossible. It does mean it's hard, and it can only occur with strong leadership for it, and even then the stars need to be aligned just right. Once it is achieved, the lobbyists will start right back in, so it's an eternal battle.

Tags: economic development.iowa tax policy.tax policy.

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