Tax Reform and Democracy

If tax reform goes forward this year, as some leaders in Congress hope, one thing is certain: It won't be an elegant exercise in representative democracy. Think more interest group feeding frenzy. 

To see what may lie ahead, I've been reading the classic inside account of the 1986 tax reform law: Showdown at Gucci Gulch: Lawmakers, Lobbyists, and the Unlikely Triumph of Tax Reform. The book is fascinating reading, at least for a certain kind of policy wonk. And also quite discouraging. 

Tax reform succeeded in 1986, but a key takeaway from the book is that it's pretty much a miracle that it did. Basically, the authors suggest that our democratic system isn't designed to handle a challenge like tax reform -- because the defenders of specific privileges and perks, even if they are a tiny group, will always fight harder than a more passive majority who want reform.

During the first half of the 1980s, the U.S. tax code was riddled with breaks of every conceivable kind and universally despised by the American public, who viewed it as unfair, and also by many legislators and pundits. Sound familiar? Still, when the tax reform battle got under way, it turned out that it was extremely hard to mobilize ordinary Americans on behalf of reform. It's one thing to support a big policy shift in principle, it's quite another to write your legislator or make a campaign contribution. 

And when push came to shove, most voters just didn't feel strongly enough about tax reform to take action on this issue. In contrast, every single interest group that benefited from various tax breaks mobilized for a life-and-death fight to defend their perks.

The same is sure to happen this time around. Sure, polls show that Americans hate the complexity of taxes and despise all the loopholes that benefit the rich. But polls also show that reforming the tax system is not a top priority issue for Americans. Meanwhile, today's interest groups are infinitely better funded and more capable than they were in the mid-1980s. Not exactly a fair fight. 

One problem is how easily sensible proposals can be demonized. For instance, a proposal to scale back the mortgage interest deduction for wealthier households could easily be depicted as an across-the-board attack on this break, panicking homeowners. Powerful groups like the National Association of Realtors have few incentives not to twist the truth -- and plenty of resources with which to do so. 

Ironically, the kind of radical tax reform deemed most unrealistic -- substituting energy and consumption taxes for income and payroll taxes -- could prove to be an easier fight, or at least a cleaner one. Instead of going up against every interest group in Washington, such sweeping reform proposals would galvanize a narrower swath of opponents. And ordinary Americans just might actually get mobilized if there was a real prospect of never having to file another income tax reform.