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For myriad institutional and political reasons, the U.S. faces tremendous tax-policy uncertainty in both the near and long term. While good tax policy is always preferred to bad, economic literature increasingly finds that policy uncertainty itself has negative implications for the economy, reducing investment, consumption, employment and growth, and possibly prolonging a weak recovery.
A new Mercatus study suggests an additional, largely unexamined cost of the United States’ tax-policy uncertainty: “unproductive” or “destructive” entrepreneurship—the diversion of resources away from economically productive activities to the unproductive activity of lobbying for preferential tax-policy treatment.
The Economic Costs of Tax Policy Uncertainty reviews existing academic research on the causes and economic effects of tax-policy uncertainty, examines the relationship between tax-policy uncertainty and increased rent-seeking (such as lobbying and political action committee spending) and considers what these findings imply for fundamental tax reform.
To read the study in its entirety and learn more about its authors, please click here .
Economic Implications of Temporary Tax Policy
Tax-policy uncertainty has been shown to negatively impact a variety of factors relating to economic growth, including investment, consumption, and employment.
The study’s findings suggest tax-policy uncertainty also leads to an increase in rent-seeking.
Causes of Tax-Policy Uncertainty
The Budget Process. In recent decades, Congress has passed a series of budget control acts intended to impose discipline on the budget process. These acts have had the unintended consequence of encouraging policy phase-ins, phase-outs, and expiration dates. This gaming of budget rules results in official estimates of budgetary impact that are unrealistically favorable, in addition to an unstable and uncertain policy environment. Over the short term, this uncertainty is reflected by the “fiscal cliff.” Over the long term, uncertainty stems from a tax system that is expected to bring in far less revenue than Congress has committed to spend.
No Lobby for Economic Efficiency. A key challenge to establishing and maintaining a predictable tax code (one with few special-interest loopholes) stems partly from the fact that economic efficiency does not have a well-organized or focused interest group to represent it. This is because while economic efficiency produces great benefits, these benefits are widely dispersed, making organized lobbying more difficult.
Lessons from History: TRA 86
The federal government’s most recent fundamental tax reform effort—the Tax Reform Act of 1986—closed loopholes, broadened the tax base, and lowered rates. Studies have shown that it greatly reduced economic inefficiencies, and some argue it laid the foundation for the United States’ strong economy during the remainder of the 1980s and in the 1990s.
“Even the simplification potential of radical tax reform depends on how enduring a simple, broad-based tax can be, in the face of constant political pressure to reintroduce special ‘ encouragements’ or to redistribute the tax burden.”
Enduring Fundamental Tax Reform
Create a code that is simple, equitable, efficient—and predictable—requires diminishing the opportunities for rent-seeking.