Mr. Watson Goes to Washington: What Principles Ought to Guide Tax Reform?

This post was written by Nathanael D. Peach.

For our day and age, artificial intelligence seems to be the pinnacle of human ingenuity. Applying boundless computing power to big data will allow humanity to solve problems that have plagued us since the dawn of time. Problems as fundamental to the human experience as death and taxes. We are on the cusp editing our genes to eliminate diseases before they happen … wait, taxes? You’re kidding, right? Sadly no. During last year’s Super Bowl, H&R Block ran an advertisement touting its new weapon in the fight to “win” your taxes: IBM’s Watson (a supercomputer). Using a supercomputer to fill out a 1040 ought to be the premise behind a lame Saturday Night Live sketch, not a sensible application of artificial intelligence. Navigating the tax code is a full time job—but, it shouldn’t be.

Why is the tax code so complicated? One group that is hard to blame is economists. NPR’s Planet Money did a great podcast on the subject here. By and large economists are not in favor of undue complexity (it creates room for unintended consequences) or using the tax code to needlessly distort people’s decisions. As an example of the latter, most economists are not fans of the mortgage interest deduction. The mortgage deduction encourages people to take on higher levels of mortgage debt than they would otherwise. There are certainly areas where economists don’t agree. But, given how much work the tax code needs there is plenty of low hanging fruit on the tree of consensus.

The hyper-complexity of our tax code is largely the result of it being used to pacify interest groups. This is done by handing out benefits to certain groups while masking the costs via spreading them out amongst other tax payers. The true cost of any particular tax code carrot is hard to see because it takes the form of foregone revenues. If I had the ear of Congress and President Trump I would urge them to make the tax code simpler. There are plenty of loopholes that should be closed and deductions that could be removed to meet this goal. I would start with the corporate income tax and mortgage deduction. Lower the corporate income tax. Let’s reduce the incentive to offshore revenues and profits and devote so much time, energy, and resources to minimizing tax payments. Reduce, or eliminate, the mortgage deduction. I don’t need to be incentivized to buy a house and you shouldn’t subsidize my decision. This goes double if I’m buying a second home.

Sadly, I am not hopeful that meaningful tax reform will happen. Politics has become a zero-sum game. A political “win” is blocking the efforts of your opponent, compromising and nudging the nation towards a better place is a “loss.” We the electorate bear some of the blame. In The Complacent Class, Tyler Cowen argues that Americans have become too comfortable with the status quo. We are unwilling to take on meaningful challenges to improve our nation. Nobody wants to give up what is “theirs.” If things are “fine,” why change them? Most people don’t believe the tax code is fine but are comfortable enough to ignore it. This complacency is a shame. The amount of rent-seeking (economic jargon for non-productive economic activity) associated with the U.S. tax code is staggering. Imagine if some of the energy, time, and resources that went towards “winning” taxes were channeled towards helping the economy grow. Large corporations could shift efforts from minimizing their tax bill towards innovation and investment. Individuals could spend the fees from professional tax return services on a nice meal out with friends. Channeling resources away from rent seeking would raise the growth rate just a bit, which would lead to the creation of more jobs, higher incomes and wealth, and a host of other good things.

My gut tells me that next April will look a lot like it has in the past. I’ll be bitter and annoyed as I plow through tax documents trying to make heads or tails of what I’m supposed to do with them. You don’t need Watson to see that we’re a nation divided, and that on too many issues we are happy to stand in our own way.

Nathanael D. Peach is associate professor of economics at George Fox University. 

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