Tax-Reform Fundamentalist

George Will

WASHINGTON — Many parents have heard FICA Screams. Indignant children, holding in trembling hands their first paychecks, demand to know what FICA is and why it is feasting on their pay.

FICA (the Federal Insurance Contributions Act tax) is government compassion, expressed numerically: It is the welfare state; it funds Social Security and Medicare. Sometimes it makes young people into conservatives.

Dave Camp was 14, working for his father's garage in central Michigan, when he made the acquaintance of FICA. Now 57 and about to begin his 11th term in Congress, he will chair the Ways and Means Committee, where he will try to implement the implications of his complaint that "the tax code is 10 times longer than the Bible, without the good news."

His aim is "fundamental" tax reform, understood the usual way — broadening the base (eliminating loopholes) to make lower rates possible. He would like a top rate of 25 percent — three points lower than Ronald Reagan achieved in 1986, with what proved to be perishable simplification.

In George W. Bush's 2004 speech to the Republican convention, he denounced the tax code as "a complicated mess" that annually requires "6 billion hours of paperwork" — now estimated at 7.6 billion. He vowed to "simplify" it. The audience cheered. Then he promised new complexities. There would be "opportunity zones" — tax relief for depressed areas — and a tax credit to encourage businesses to establish health savings accounts. The audience cheered.

This is perennial mischief — using the tax code not simply to raise revenues efficiently (with minimal distortion of economic behavior) but to pamper pet causes, appease muscular interests and make social policy. Since 1986, the tax code has acquired more than 15,000 complications.

"Targeted" tax cuts are popular complexities because they serve a bossy government's agenda of behavior modification: You can keep more of your money if you do what Washington wants. The tax code, says Camp, "should not be a tool of industrial policy" or of "crony capitalism": "Politicians should not pick the industry of the day."

One of Camp's objections to the health care law is its obvious design to cripple health savings accounts. With HSAs, an individual who buys high-deductible health insurance becomes eligible for tax-preferred savings out of which he or she pays routine health expenses. (No one expects auto insurance to pay for oil changes or new windshield wipers.) This gives consumers of health care an incentive to shop wisely for it. Camp says the health care law will make HSAs less attractive because "a qualified plan will be defined by the government rather than the market." And government will make HSAs unnecessarily expensive by requiring them to have "all the bells and whistles."

Many conservatives, including Camp, believe that although most Americans should be paying lower taxes, more Americans should be paying taxes. The fact that 46.7 million earners pay no income tax creates moral hazard — incentives for perverse behavior: Free-riding people have scant incentive to restrain the growth of government they are not paying for with income taxes.

"I believe," Camp says, "you've got to have some responsibility for the government you have." People have co-payments under Medicare, and everyone should similarly have some "skin in the game" under the income tax system.

In addition to the one-third of the 143 million tax returns filed by individual earners for 2007 that showed no tax liability, additional millions of households have incomes low enough to exempt them from filing tax returns. The bottom two quintiles of earners have negative income tax liabilities — they receive cash payments from the government via refundable tax credits.

Camp remains amazed by the slipshod practices by which banks and other financial institutions made mortgage loans without due diligence. He remembers that "the president of the bank approved my first Visa card." Other things have changed, too. "I used to do my own taxes," Camp says, "until I got on Ways and Means." No more. The tax code is so complex that the chairman of the tax-writing committee, like many millions of Americans, cannot be confident he can properly perform, unassisted, the duty of paying taxes.

If Barack Obama is accurately reported to be considering serious tax simplification and lower rates, he will have an ally in Camp — up to a point. Serious arguments about taxes are never just about taxes. They are about government's proper size and purposes. Concerning that, Obama differs with Camp, who says: "Washington doesn't have a revenue problem. It has a spending problem."

© 2010, Washington Post Writers Group

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