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POLITICAL DEVELOPMENT IN CONGRESS AND THE DIFFUSION OF AUTHORITY OVER U.S. TAX POLICY BY SETH J. BORDEN A Thesis Submitted to the Division of Social Sciences New College of Florida In partial fulfillment of the requirements for the degree Bache lor of Arts Under the sponsorship of Dr. Keith Fitzgerald Sarasota, Florida May 2013
ii Acknowledgements First, I want to express my appreciation for the support of my family. T hank you to my parents for their unwavering, unconditional support for every endeavor I have undertaken and all the decisions I have made in the past four years. One of the important lessons I have learned here is that with time and experience, my awareness and understanding of all they have already done for me will only grow. I would not have been able to reach so far without the knowledge that they would always be there behind me, urging me on wards and propping me up, and I thank them for that. Thanks also to my brothers, Dylan and Connor. Despite being apart, I feel that I got to know you both more in these last four years than in all the first eighteen together, and as we continue to develop I am only optimistic about what is to come. I would not be where I am today without the guidance of my advisor, Barbara H icks. Despite working in divergent fields, since the day I met her in 20 09, I have been confident that I could not have had a better mentor I will always be grateful for the good natured and constructively crit ical approach she took to the mistakes that are inevitably a part of growth, and for the care she has shown in her relentlessly hard work on my behalf. I owe much to my thesis sponsor, Keith Fitzgerald. His insightful and intriguing lectures, which opened my mind to the field of American political development, were the inspiration for this thesis. I am humbled to have had the direct counsel of such a strong mind throughout the past two years and grateful for the time he has taken to discuss and sharpen the ideas contained herein. Thank you to all the faculty and staff that had provided the academic setting in which I could thrive. Special thanks to Richard Coe, Jing Zhang, C ourtney Hughes, Donita Pace, Shaun McDonough, Joe Mink, Dawn Shongood, Aijun Zhu, Gordon Michalson, and David Brain; whether you are still working with students here or involved in other pursuits you have all made an impact on my college experience Las t but definitely not least, thank you to the close friends I have made over the last four years ; you know who you are Yo ur camaraderie, love, mutual respect, and counsel have been by far the most transformative forces in my life here My New College experience has been defined by all that we have shared, and my future will be shaped by the indelible marks you have made on my personality and by the experiences we will continue to have together.
iii TABLE OF CONTENTS Ackn ... ii Table of C .. i ii iv v Chapter One : Introduction and Literature Review ... 1 1. I ntrodu 1 2. A Re view of Literature in Public Economics and APD. 6 3. Structur 18 Chapter Two : The Historical Institutional Perspective 20 1. A Model of Congressional Incentives 21 2. Defining Political Development in Tax Institutions 27 Chapter Three : An Institutional History of U.S. Tax Authority 34 1. Chapter Outline .. 35 2. The Early Regimes 1789 1860 3 7 3. The Civil War Regime 1861 1912 43 4. The Income Tax Regimes 1913 1959 49 5. The Watergat e Reforms 1960 2013 64 6. 70 Chapter Four : 21 st Century Tax Reform and Political Developmen t ... ................... 76 1. Prospects 77 2. The Instit utional Perspective and Durable 78 3. Speculations on Future Dev 8 1 4. Limitations of Study and Future Res 83 84
iv LIST OF ACRONYMS American Political Development APD Bipartisan Campaign Reform Act BCRA Congressional Budget Office CBO Deadweight loss DWL Earned Income Tax Credit EITC Economic Recovery Tax Act of 1981 ERTA Federal Election Campaign Act FECA Federal Election Commission FEC Gross Domestic Product GDP H ouse Committee on Ways and Means HCWM Internal Revenue Service IRS Joint Committee on Taxation JCT Political Action Committee PAC Senat e Committee on Finance SCF Tax Reform Act of 1986 TRA
v POLITICAL DEVELOPMENT IN CONGRESS AND THE DIFFUSION OF AUTHORITY OVER U.S. TAX POLICY Seth J. Borden New College of Florida, 2013 ABSTRACT This thesis argues that the failure of modern efforts to lastingly simplify the tax code demonstrates the need for a new approach to tax reform, an d suggests that reform which takes into account the historical development of tax institutions in Congress would be most effective. The study proceeds fro m a baseline understanding that our current tax code deviates from the standard of the Haig Simons definition of income as much as it did before the Tax Reform Act of 1986, meaning that it is inefficient and inequitable in a variety of ways and that the TR A was unsuccessful in addressing these concerns It establishes an analytic framework that focuses upon the changing incentives of instituti onal actors in Congress as the primary driver of institutional development which causes changes in the tax code over time. T he primary insights gained by this analysis are that the incentive of members to insert provisions into the tax code to increase their chances of reelection has risen over time, and that the tax code is a product of the institutionally bounded expr ession of the political motive to be reelected and can only be lastingly changed through institutional reform. _________________________________ Dr. Keith Fitzgerald Division of Social Sciences
1 Chapter One : Introduction and Literature Review 1. I ntroduction Using the Haig Simons definition of income as a comparative benchmark 1 the current United States tax code is arguably as complex, ineffective, and unfair as it has ever been Despite this failure by t he government to produce an optimal revenue system, voters cannot democratically rectify the situation because the responsibility for such failures in the United States is diffused over several institutions constituted of hundreds of individuals in governm ent. The revenue our government collects is insufficient for our appropriations commitments, and the way it collects the revenue is inefficient and inequitable. C omplicated provisions waste b illions of hours: in 2011, 6.1 bn taxpayer hours were spent on tax activities the equivalent of more than thr ee millio n full time, hidden IRS workers (Riley 2011) A review of the literature will demonstrate that t ax expenditures which are a common feature of the U.S. tax code, provide larg e subsidies to certain industries and 1 The Haig income as the (Gruber 2011) See Musgrave (1967) for a defense of its use as a standard on which to base tax reform.
2 groups skew ing efficient market incentives re ducing progressivity of the code and bloating interest groups that limit the flexibility of lawmakers in decisions on tax legislation As I will demonstrate in the litera ture review, these subsidies are unfair in their differing treatment of various economic choices, and in their regressive effect on the distribution of federal taxes. The authority to write tax legislation is dispersed among many institutions and individua ls in modern government. The House of Representatives has the prerogative to create money bills as a result of Article I, Section 7, c lause 1 of the Constitution, known as the origination clause. This means that its tax writing committee, the House Committ ee on Ways and Means, has substantial influence over tax legislation But when Congress passes a budget that is inefficient, unfair, and insufficient for revenue needs, one cannot reasonably place direct blame on that committee. In the budget process, the bills, the President and Treasury officials may use the party leadership apparatus in Congress to exert executive influence, and individual members of Congress may att empt to use the code to win the support of interest groups or constituents Theoretically, the first result of this scattered distribution of authority is a lack of collective responsibility over the creation of efficient and fair taxes. I ndividual actors in government who have authority over money bills are not individually responsible for the final product, meaning that any member with the ability to influence the process has the incentive to use it for political purposes and a very small chance of any p olitical repercussion for any such activity The second result is that ability of citizens to affect the
3 process in a meaningful way through voting and participation is diminished when no single government official or entity can be singled out as responsib le for budget failures. Our budgeting process today is a part of a s trand of institutional development that branched off from British institutional heritage and diverged significantly over time. In the United Kingdom today, the Chancellor of the Exchequer (an executive branch minister generally considered second in the government hierarchy only to the Prime Minister) has ultimate authority to set levels of revenue and appropriations and committees and MPs attempt to infl uence him or her to ensure the direction of funds to certain uses. In this situation, the Chancellor of the Exchequer bears ultimate responsibility for failures in the British budgeti ng process, making him or her directly accountable to t he public on budget issues. I n the case of any failure or objectionable tax policy, citizens are able to use their vote to directly express their interests. E fforts to reform the U.S. tax code have failed to make the system economically efficient and fair in the long run. The Haig Simons de finition of income has influenced several reform movements. The premier example of such a reform was the Tax Reform Act of 1986, which had few major lasting effects except to lower overall marginal rates and expand the Earned Income Tax Credit. More recent ly these ideas have influenced proposals advanced by the National Commission on Fiscal Responsibility and Reform (commonly known as the Simpson Bowles Commission) formed by President Obama in 2010 to draw up a framework for tax reform that would put the g overnment on a more fiscally sustainable path. Support within the Commission was not strong enough to send an official proposal to Congress, and no viable bill materialized to turn the recommendations into law. Many members opposed an overreliance on regre ssive
4 spending cuts, others worried about certain cuts being too damaging to the economy, while still others did not feel the proposals made a significant enough effort to constrain the growth in healthcare spending. Despite the soundness of the tax reform aspects of the plan Congress has shown little appetite for the polit ically difficult decisions that would have to be made. What caused the diffusion of authority that makes it difficult to assign blame for budget failures in the United States thus allo wing representatives to write economically inefficient and unfair tax expenditures into the tax code ? Why have several reform efforts, notably the Tax Reform Act of 1986, ultimately failed to be successful in the long run? This analysis co nceptualizes the inability of the federal government to provide a sufficient revenue stream in an efficient way as an outcome of the historical development of Congress and its ta x writing committees : the Committee on Ways and Means in the House and the Committee on Finance in the Senate. Outside of Congress, development s in the U.S. Treasury and in the campaign finance regime have altered the incentives of representatives and thus altered the course of the development of the Congressional committees I will use historical institutional analysis to demonstrate that development in the tax making process of the United States g overnment is driven by institutionally bounded conflicts over tax authority by members of Congress operating on polit ical motives. I argue tha t the expression of political self interest by individual members in the context of the rising value of distributive benefits 2 has led to the diffusion of tax making authority 2 Lowi defi nes these as policies which are characterized by the ease with which they can be disaggregated and dispensed unit by small unit, making them akin to patronage (1964, 690) In the context of appropriations, these include defense spending, rivers and harbors programs, etc. In the context of revenue, distributive benefits include tax expenditures and tariffs.
5 Thus, the diffusion of authority has been caused by a series of conf licts amo ng members of Congress over access to the increasingly important power to provide distributive benefits to any actors who can affect their reelection potential Inefficient and inequitable tax expenditures are common in the tax code because institutional d evelopment has given members of Congress increasing incentives to use the tax code to maintain the support of special interests. These incentives have aligned the interests of most members behind the diffusion of tax writing authority, increasing individua l influen ce on the tax code and diminishing their responsibility for budgeting failures W e have a deficit problem and an inefficient and inequitable code despite numerous reform efforts and apparent problems with our budget because the reforms did not affect inst itutional development. They created more ideal tax code s at specific points in time but did not ensure th at the instituti ons and the political incentive structures they created were modified so that the tax code would continue to adhere to principles that formed the basis of the reform. When observed through a historical institutional lens, seemingly random outcomes in our tax code are seen to be natural outgrowths of the interactions between relevant institutions as they develop over time and structure normal political competition. This study will delineate what does and does not constitute political develop ment in tax institutions, and will demonstrate that significant changes in tax code outcomes over time have been driven by institutional developme nt. The centrality of institutions means that individual actors and even ts have had lasting influence on tax o utcomes only to the extent that they have altered the course of institutional development We will see
6 that significant changes in the tax code do not necessarily cause political development, evidenced by reforms in the late 1970s and in the 1980s. 2. A R eview of Literature in Public Economics and APD A brief review of literature in the field of public finance and tax theory will provide a theoretica l ideal which can be used as a comparative benchmark for an evaluation of the current tax code, which ass esses the economic implications of tax expenditures and federal debt and demonstrates that the current tax code is suboptimal. I will survey literature on tax expenditures that offer explanations for their prevalence that are outside the field of political development. Finally, a review of literature in the field of American political development will focus on institutions as a way of understanding the effects of individual action. 2.1 Public Economic Theor ies and the Ideal Tax Code This study draws upon the work of the bulk of public economists and tax lawyers in making the assumption that the ideal structure of an income tax in the United States is one that is broad based (horizontal equity), progressive (vertical equity) and has low rates (economic efficiency). A natural extension of this assum ption is that tax expenditures that are not designed to increase vertical or horizontal equity in the tax are always suboptimal in t erms of fairness an d efficiency.
7 Horizontal Equity and the Economic and Fairness Benefits of a Broad Base Economists broadly agree that the tax code should be horizontally equitable ; that is, it should not favor one economic choice over another among people of similar e conomic status (Auerbach and Hassett 2002) Accordingly, it should not contain any deductions or subsidies that do not correct for a market failure. In this way, the code will promote economic efficiency by leaving it to the private market to allocate capital where it is most productive, rather than introducing incentives for purely political reasons that only decrease e conomic efficiency. H orizontally inefficient tax structur es bloat certain industries; the degree to which an industry is bloated will be the degree to which it depends on the continued existence of the horizontally inequity in the system, such a tax code wil l produce actors who reinforce the inequity (Gruber 2011) Vertical Equity and Progressivity in the Tax System A tax system should siphon resources from society in a way that is vertic ally equitable, which is the idea that individuals should be taxed according to their ability to pay This idea rests on the principle that utilit y ( an arbitrary measure of wellbeing) is a better basis for taxation than nominal dollars. Utility should be taxed at a rate that is as similar as possible, with the government diminishing the well being of every person equally. Si nce our primary mode of t axation is through the income tax, it should have progressive marginal rates. Such rates will burden everybody similarly, despite taking much more i n nominal dollars from the rich Despite the fact that wealthy people would pay more dollars in taxes even w ith flat and many regressive rate structures, each of those dollars provides them with much less utility due to the diminishing marginal utility
8 of wealth; that is, each additional dollar increase s your well being by less and less ( Gruber 2011) Simplicity, Low Marginal Rates, and Deadweight Loss Deadweight loss (DWL) in public economics refers to the loss of effic iency in the economy that reduces tota l output relative to output in absence of the policy. A ny given tax policy will lower the macroeconomic efficiency of a revenue system to the extent that it creates DWL (Gruber 2011) Barro (1979) emphasizes that taxes are distortionary and create DWL by modifying incentives in the marketplace, shifting aggregate economic decision making away from a Pareto optimal level and reducing total output. He notes that the DWL from a tax increases at a roughly exponential rate as the tax rate increases. In other words, if a government had a top marginal tax rate of 25% and raised it to 50% the rate would have doubled but the DWL would more than double. This leads to two conclusions: that l ow marginal rates on a broad segment of the population are preferable (in terms of tot al economic output) to high rates on a limited segment of the population, and that rates should be s mooth across time because spikes in rates for a limited period will gather the same revenue with less efficiency than slightly raised rates for a longer per iod of time Another way to reduce DWL is to increase administrative efficiency; that is, to reduce the amount of time and money spent by citizens in complying with the code and by government in ensuring compliance. Dollars spent coll ecting taxes are DWL and reduce the potential of government progra ms to stimulate economic growth because the benefits of a program to the economy must justify administrative costs, whereas an efficiently administered tax would only have to provide a small return on each doll ar
9 collected In the case of the income tax, fewer deductions, exclusions, and preferential rates would reduce the waste that occurs as tax filers spend time and money to itemize their deductions (Gruber 2011) 2.2 Deviating from the Ideal: Expenditure Programs in the Tax Code Tax expenditures are deductions exclusions, and preferential rates which selectively lower the tax burden on individuals and businesses. This section will identify the origin and purpose of the concep t of tax expenditures and examine how the characteristics of most expenditures deviate from the ideal using the example of the home interest mortgage deduction. Deductio ns Exclusions, and Preferential Rates as Tax Expenditure Programs Deductions were in cluded in the original tax code to p rotect certain economic activities and while they were initially very modest forfeitures, by the 1970s they had ballooned to unforeseen proportions, inefficiently distorting economic decisions in the marketplace. Econom ists in President Ca began to favor the use of the term tax expenditure to describe certain parts of the tax code. A prominent voice in the Treasury was Stanley Surrey, who arg ued that certain provisions of the tax laws are not really tax pr ovisions, but gov ernmen t spending programs disguise d in tax language (1973, vii) Surrey argued that the gov ernment should publish expenditures budgets, hoping that if policymakers acknowledged that tax expenditures were spending programs, it would encourage them to be repealed as ineffective means of providing federal subsidy (179 180)
10 Tax Expenditures: Vertically Inequitable Most of the tax expenditures in the U.S. tax code make the code as a whole less vertically equitable, and the home interest deduction is a primary example. To begin the discussion of vertical equity issues with major tax exp enditures, Figure 2.1 serve s as a good point of reference, showing the distribution of total dollar benefits to four income levels of three major tax expenditures. It clearly displays that more foregone dollars go to people with higher income levels than to those with lower income levels Figure 2.1 Value of Major Tax Expenditures by Income Level Reproduced from Mettler (2011)
11 The home interest deduction is vertically inequitable, and its effect on the tax system is to reduce the progressivity of the income tax as a whole. It benefits most middle class households, and this fact is often used by proponents of the deduction to obscure the overall di stribution of benefits. The fact is that the rich receive the vast ma jority of the foregone revenue. T h e deduction becomes larger as the value of the home and mortgage climbs (up to homes worth $1m) and the mortgage interest of second homes is also deductible, and both of these factors mean that the existence of the deduction has a regressive effect on the distributive impact of the tax code. The fact that each rich household claims benefits that are much larger than those of poorer households means that despite the fact that the rich make up a small portion of the population, they receive the majority of t he benefits. As one can clearly observe in Figure 2.1, in 2008 those who made more than $100,000 (who were the top 15% of earners that year) claimed 69% of the benefits of the home interest deduction, while those earning under $50,000 received only 5% of t he benefits. On a theoretical level, the home interest deduction does not distribute benefi ts in a way that is efficient. Ideally, it would give the largest subsidies at lower levels, where people are less likely to be able to afford a house at all, and th us increase aggregate utility by the largest amount. Instead, it showers the overwhelming majority of benefits where they will make a relatively small splash in terms of increased utility. Tax Expenditures: Horizontally Inequitable Most tax expenditures skew the incentives of individuals and modified economic activities away from an economically efficient equilibrium. Thus, unless a given tax
12 expenditure exists to correct for a market failure, it skews economic incentives inefficiently. There is not yet c onsensus on whether homeownership brings society enough positive externalities to be worthy of federal subsidy Homes constitute a significant portion of the wealth of many American families, and there is evidence that ownership may be worthy of subsidy as a social safety net for the poor and lower middle class (Conley and Gifford 2006) Even if homeownership does have positive externalities, Glaeser and Shapiro (2003) note that the home inter est deduction is very inefficient mode of subsidy because much of it goes to people on the upper end of the income distribution, who are likely to own a home regardless of subsidy level. Thus, it is unlikely to increase the homeownership rate or influence it at all because it is unlikely to significantly benefit those who are at the margin of homeownership: the poor and the young (Glaeser and Shapiro 2003, 40) The home interest deduction skews investment decisions: wh ile it does not make people buy houses, it does make them buy bigger houses when they do, and this inflates the housing industry and pushes home prices up (Gruber 2011; Lowenstein 2006 ) T his skewed incentive structure has significant economic consequences, possibly making it harder for people to afford the more expensive homes, and fueling speculative bubbles to heights that they would not otherwise reach In conclusion, the deduction unfairly places a higher burden on rent ers versus owners in the tax system, increases volatility in the housing market, and encourages capital to flow into real estate investments where it is less productive than it would be elsewhere, benefiting realtors and other industry experts in relation to other industries.
13 The Ideal Tax Expenditure There are exceptions to the above critiques of tax expenditures when a given expenditure is designed to increase horizontal or vertical equity. Subsidies within the tax system that modify inefficiencies in t he economy may have some economic justification as long as they do not overly complicate the system and as long as they do not benefit an industry that will try to expand and protect a deduction even when it provides no public benefi t. The EITC for exampl e, benefits no industry, but does measurably increase the vertical equity of the tax code and achieve its stated goal of providing welfare even as it encourages entry into the workforce, alleviating poverty using two different mechanisms. 2.3 Political Th eories on Budgeting and Tax Expenditures Researchers have examined tax expenditures and have posited theories on the tendency of our tax code toward inefficiency, inequity, and complexity in the modern era. The current body of literature is insufficient in that it tends to discuss the incentives of politicians w ithout giving mention to the institutional framework in which they operate, thus robbing the current analyses of historical context that provides for a comprehensive understanding of what our tax code is and what its origins are. Chong, Citrin, and Conley (2001) argue that citizens who have a significant degree of knowledge about a policy, government program, or any current issue are able to mor e readily form opinions on them. Citizens with informed opinions are more likely to advocate for a position according to their self interest using their opinions of the actual effects of the policy to take a side and to influence the political system in that way. On the other hand, people who have little preexisting k nowledge of a certain policy or issue
14 are likely to be more influenced by ideological arguments and emotional appeals using their values and principles to form opinions They are also very unlikely to see their self interest in a given situation, and are not likely to be politically active over the issue. To minimize DWL it is best for a tax system to burden everybody a little tha n to heavily burden a small subset of the population and not affect everybody else. A program that benefits few people signifi cantly will survive if it spreads the related burden of the program widely enough to keep individual burdens low (Gruber 2011) This argument has been used as an explanation for the popularity of the regressive tariff regime th at funded the federal government of the Republican Party from the mid 19 th century until the early 20 th century (Kennon and Rogers 1989) Mettler (2011) synthesizes these ideas into the argument that tax expenditures are code to maintain political power. Following the logic of previous theories Mettler argues that people have strong opinions on di rect spending programs like Medicare and Social Security, in no small part because they know the redistributive structure well, (progressive for the former and regressive with progressive payments for the latter) and val ue them for that reason. They are mu ch more likely to see their self interest in the programs and defend them. programs in the submerged state are hidden to the public in a way that is democratically problematic. She argues tha t politicians give privileges to powerful interests without political repercussions by taking advantage of the political inaction of ill informed people by operating within a framework that is largely invisible to Americans (Mettler 2011)
15 While most Americans are unaware of the troubling redistributive implication s of tax expenditures and are politically inactive, a minority of the country recognizes a strong stake in certain provisions and defends them vigorously (Mettler 2011) They are also able to take advantage of the fact that emot ional appeals are very effective in those who do not have sufficient information to form a strong stake in an issue The National Association of Realtors, for example associates the home mortgage interest deduction with ideals of the middle class, charging those who would repeal it with attempting to destroy the middle class dream of home ownership, raise taxes on the middle class, and burden families with children (T he Facts Ad 2012) These assaults are all designed to obscure the fact that repeal would overwhelmingly hurt the rich, but are effective among a population that believes that the home interest deduction mostly benefits the middle class. Mettler qualifies h er claims with a study that shows Americans supporting major deductions with a vague explanation of what each is, before they opposed those with regressive distribution schemes after they became aware of their impacts (Mettle r 2011, 69) These ideas do not provide a comprehensive explanation for the failure of tax reform and the propensity of our government to produce inefficient and unfair tax codes ; they rely too much on mono causal explanations that are removed from the historical context that is so important to understanding the institutional origins of the modern budgeting process. T he field of American political development offers a useful framework within which the history of tax institutions can be usefully employed in understanding the present day.
16 2.4 American Political Development Concepts and frameworks from the field of American political development can foster a better understanding of what the t ax code is and how it is formed. This understanding will provide the basis for a more useful approach to tax reform that posits institutions as the most useful targets of lasting reform. Defining Institutions In APD, institutions serve as an analytical t ool for unde rstand ing how the actions of individuals are structured in each moment in time and how the impact s of those actions are carried through time An institution is any entity that is composed of operatives who promote change, often in the course o f resisting it from others, that impacts individual and collective political identities among those subjected to their control, and that become implicated in the historical construction of disjoint politics (Orren and Skow ronek 2004, 18) I nstitution s are entities with several characteristics. They have two principal modes of action: institutional action, which encompasses internal activities to achieve a stated purpose, and political action, which is any action aimed at controlling or influencing people outside the institution (81) In acting institutionally, institutions have purposes (reasons for existence that are sometimes formally stated) norms and rules for behavior ( customary or codified rules enforced through discipline) ; they assign roles in which appropriate behavior is expected (this affects how members of institutions interact with society) and they operate within boundaries either prescribed or self defined, wh ich and other institutions (82) T his definition of institution s is flexible enough to include a variety of
17 entities that structure th e actions of individuals, from formal institutions such as the Supreme Court to informal institutions such as the separation of church and state (145) Orren and Skowronek effectively articulate the utility o f institutions as the ideal analytical tool in understanding the importance of history as constitutive of the present day political environment: When individual interests and motives are understood with reference to their institutional settings, when poli tical institutions are understood in terms of controlling outsiders, when own institutional composition, the political analysis of institutional effects naturally leap frogs to wider interactions, extending over lengthening time horizons. (87) Individuals are finite, but their actions are not, and APD theorists argue that the best way to understand the lasting impact of individual action is to study how it is transmitted through time by institutions. I nstitutions a re durable and carry the influence of individual actors with them across time. I n this way the action of an individual at one point in time becomes part of a l arger process and continue s to influence present day outcomes. Institutions as the Target of Reform Government institutions must be the primary target of any reform that will have any lasting effect on the t ax code, with limited exceptions (see Chapter Four, Section 2 .2 ) When a politician approaches our tax code intent on reform to increase its adherence to principles of fairness and efficiency it is essential that he or she understand that the code is not an entity separable from the continuo usly develo ping institutions that shape it. The code is not an inert thing that exists at just one point in time and can be modified lastingly
18 by one piece of tax legislation. It is in fact a manifestation at any point in time of the way tax institutions s tructure the expression of political self interest over the tax code This approach to reform allows us to see that individual representatives will only be able to modify the tax code in the long run to the extent that they modify the institutions that c ontinuously structure the expression of polit ical self interest of representatives in the creation of tax legislation. This study focuses on the political motives of institutional actors within the government, with non governmental institu tions being incl uded in order to analyze the ir effects on the development of government institutions. Orren and Skowronek (2004) argue that government institutions a re the primary interest of APD because their authority to regulate and control other institutions by mandate puts them at the center stage, with non (84 85) 3. Structure of the Study C hapt er T wo develop s a n analytical framework with which to analyze the history of development i n tax institutions. D rawing from literature on the incentives of members of Congress in relation to committees it establish es formal defi nitions for the political mo tive s and institutional constrai nts that structure the action of members of Congress members in their efforts to acquire tax authority. Chapter Three presents historical evidence to support the framework established in Chapter Two identifying major developments in tax institutions over time and demonstrating that they were driven by conflict between politically motivated and
19 institutional ly bounded actors. This analysis demonstrate s that the rising incentives of politicians to hav e access to distributive benefits gave representatives the political motive to support the diffusion of tax writing authority. Cha pter Four build s on conclusions of Chapters Two and Three to qualify the statement that current reform efforts are li kely to be as transient as the Reagan reforms were in terms of tax code fairness and efficiency Then, with the historical institutional analysis in mind, assertions can be made about how this new perspective might be used to inform a more lasting approach to tax reform.
20 Chapter 2: T he Historical Institutional Perspective This chapter will outline the theoretical framewor k by which I proceed to demonstrate that the institutionally bounded expression of political self interest by political actors over tax authority in the context of the rising value of distributive benefits caused that authority to become diffused over time. The primary purpose is to formally establish that members of Congress struggle over t ax authority with an i dentifiable motive and a constraint : the nec essity of reelection constitutes what I wi ll term the political motive, and the position of an individual within a given histori cal institutional context constitutes what I will term the historical institutional constraint. The political motive will drive politicians to actions that will be constrained by the institutional network within which they are situated. These two analytical tools will allow us to organize and model the behavior of Congres s members in rela tion to the tax code.
21 1. A Model of Congressional Incentives 1.1 The Political Motive Members of Congress as the Basic Analytic Unit I draw from Mayhew (1974) in using individual representatives as the basic analytic unit in understanding the incentives structures that are present in Congress This is a choice made consciously over other basic units, the pri mary alternat ive being the political party. Downs (1957) presents the original articulation of this party centric theory, arguing that parties have control over the actions of government when their members are in the majority rather than individual members, and argues that voters will judge whether the party in power is serving their needs and will vote accordingly. 3 Mayhew counters that this model breaks down in the case of the U.S. Congress, and that it is more appropriate for governments with electoral systems and government structures that make members of le gislatures more reliant on parties for election and career advancement (1974, 25 28) The diversity of electoral pressures arising from U.S. congressional districts, the fragmented power structures of U.S. gover nment, and the traditionally weaker national party organizations all lead me to use individual members of Congress as the basic unit of analysis. Electoral Incentives and the Political Motive In order to develop theories about aggregate behavioral pa tterns of representatives in a given institutional circumstance, I will borrow from Mayhew (1974) in treat ing 3 See chs. 2,3.
22 minded seeker themselves, take public positions, and distribute benefits to constituents to maintain political power. Reelection is not the only motive in Co ngress, but it is the one that all members have in common. Fenno (1973) posits three motives behind the actions of representatives: the desire to be reelected, the desire to achieve influence in Congress, and the desire to make good public policy. These latter two incentives and others are surel y present in Congress, but the reelection motive is the common denominator because all members must be reelected to further any other goal Mayhew notes that these goals are not always mutually exclusive, because achieving influence and making good public policy are consistent with maintaining political power in some circumstances (16 17) In the aggregate, these reelection minded representatives will act in ways that are consistent wi th the foremost goal of political survival. The motive to act arises from a perception common among members that their chance of losing a bid for r eelection is fairly high. While the reelection rate for i ncumbents is high most members have experienced at least one close electio n, and thus members feel much less secure in their seats than is commonly acknowledged (Mayhew 1974, 35) In the end, the only resource box, but other resources that can be trans lated into votes are money, the allegiance of actors who can make persuasive endorsements and organizational skills in the form of a solid volun teer base (41 42) will act in three distinct ways based upon the motive to be reelected. They will advertise, which in this case involves enhancing name recognition and associating themselves with positive traits in the minds
23 of constituents (1974, 49 52) They will take public positions, generally conservatively following public opinion on a given issue in their district to decide what the strength of the endorsement or repudiation should be (62 72) Finally, members will claim credit for desirable government actions, ensuring that their claims are credible enough to be believed by the average voter in their district (53 61) Distributive benefits, or policies (Shepsle and Weingast 1981) are a primary tool of reelection minded actors in improving their electoral fortunes. These benefits range from construction projects like dams and roads to targeted tax expenditures that benefit a given constituency. The intent of this study is no t to be deterministic a bout the actions of individuals ; m emb ers of Congress are autonomous and often operate in a way that is inconsistent with the above assumptions. Mayhew acknowledges this fact and admits that no deterministic statements can be made (1974, 73) It remains true that identifying the common denominator of political motivation is an effective way to model the aggregate behavior of members of Congress. Mayhew points out that members are not a uniform group and that there is flexibility within his framework to account for this: members of marginal districts, for example will act differently than members of safe districts. Alvarez and Saving (1997, 59) analyze t his difference to postulate that representatives of marginal districts will tend to spend more time than members from safe districts on securing distributive benefits.
24 Thus, differences in constituencies cause members of Congress to use these tactics to differing degrees, but all members use them to some extent because of the basic political motive to be reelected. Distributive Theory The analysis of this study is firmly couched within the assumptions of distributive theory on the purpose of the organization of Congress. In this perspective, legislators maximize their probabilities of reelection through the acquisition of federal funding, and Congress is organized to facilitate this acquisition (Shepsle and Weingast 1981) In this way, standing committees exist as part of an organizational structure that facilitates the political motive to be reelected. There are various ways in which committees are politically desirable: Kroszner and Stratmann (1998) argue that t hey facilitate regular exchanges between specialized committee members and interest groups to satisfy political motives while avoiding ethics issues involved with direct monetary contracts between members and outside interests 1.2 The Historical Institutional Constraint Defining the Constraint Individual action of members of Congress is not deterministically defined by the political environment in which the member operates, but the range of probable and feasible action is constrained in a way that affords analys ts a degree of power to predict the developmental impact of the expression of political self interest by representatives. In
25 other words, m embers will act on the political motive, but the developmental impact of that action will depend on the historica l and institutional context of that action. E xamples of the historical institutional constraints on individual action abound. In the two decades from about 1820 1840, the House Ways and Means Committee had wrested authority over tariffs from the Committee on Manufactures, and development of the young legislature had proceeded such that it had become the most influential committee in the House of Representatives (Kennon and Rogers 19 89, 95 97) When the elections of 1840 swept Whigs into control of Congress and the Presidency, the fact that Democrat who did not fully support the Whig agenda, al lowed then chair of the House Ways and Means Committee Millard Fillmore to use the power of his position to assume the mantle of pushing the primary policy goals of his party over the vetoes of their obstructionist President (128) if a more resolutely Whig president had been in office, as was the developmental significance of that action to the committee. Having John Tyler in th e White House left a dearth of leadership in a newly empowered Whig party, and the contingent fact that a very capable politician was chairing the influential Ways and Means Committee just as this situation came about meant that Fillmore was able to take a ction that pushed the bounds of what had been done before, by virtue of not only his ability but of institutional and historical circumstance. His leadership in that historical moment expanded the the next historical moment, a development caused by the institutionally bounded interaction of autonomous actors.
26 In this way, the ability of members in Congress to influence the tax code and the way they will week to influence it is circumscribed by a v ariety of institutions that a re constantly developing and their expression of political self interest within this institutional framework will feed into this pro cess of development. It will therefore be possible to divide history into stabl e periods in wh ich the expression of political motives by members over tax authority w ill produce a code with predictable characteristics. Constitutionally imposed Institutional Constraints and Initial Authority Distribution The Constitution divided the power over mone y bills between three entities with the origination clause, which granted the House the ability to originate money bills, the Senate the ability to amend them, and the executive the power to veto them. Thus, the power to create tax law was firmly lodged in the legislature. It granted each branch the ability to fend off encroachments by other branches in a formal separation of powers. These constraints have fundamentally structured conflicts over tax authority. Thus, the Constitution set the stage upon whic h all further tax authority struggles would take place. Theoretically, the all tax writing authority lay with the House, with each representative having equal share of this authority. The Senate could offer amendments to what the House created, and the exe cutive could express preferences bluntly through use of the veto. In Federal Taxation in America, W. Elliot Brownlee divides the history of with its own characteristic tax base, rate structure, administrative apparatus, and social
27 (Brownlee 2004, 2) These regimes are distinguished by primary revenue sources and spending programs designed to maintain the political alliances which created them and which actors on both sides of the political aisle developed ways to exploit. Fundamental shifts in tax regimes have been for ced at certain junctures in time by crises that render existing revenue systems inadequate, at which point contingent events influenced the layering of a new regime upon the old one to create a new scope of development for the code. Each regime encapsulate s the historical and political environment in which the entire government develops. It is a set of relationships so broad that the actions of essentially every government actor in relation to tax authority are constrained by the charact eristics of a given regime, and thus they will prove useful as boundary conditions to demarcate different periods in institutional history. 2 Defining Political Development in Tax Institutions 2.1 A General Defi nition of Political Development Authority, Shifts, Durability and the Definition of Political Development Orren and Skowronek (2004) define a few basic concepts that they use to construct the concept of poli tical development. Authority is defined as a legitimate, enforceable, st able force exercised through institutions (124 126) Authority is understood a s plenary; that is, institutions exercise a monopoly on all authority at any point in time, and this means that that any change in authority relationships will be a shift, meaning that some institutions will cede authority to others, rather than creating authority that did not previously exist (127) Durable refers to how lasting any given shift in
28 authority is, in relation to the span of time in question (129) With all this in mind, the authors ca (123) This definition allows ask where and when shifts in authority occur, why and by what processes, and to inquire into their c onsequences is to place exacting demands on the description of change in governance over time, on the identification of causes and the weighing of their relative significance, and on the accurate portrayal of the new h (123 124) Political Development of Tax Institutions In this study, the term authority refers to the extent to which an institution is able to influence the final content of tax legislation. Two primary factor s constitute authority: the legitimacy of institutional action and the capacity of institutional action. The legitimacy of institutional action is a function of constitutionally constraine d precedent. The capacity of institutional action is a function of the bureaucratic maturity and technical expertise of any institution and will be a large part of what influences the distribution of authority, because an institution that is more able than another to do the work of designing and writing tax policies will have enhanced influence. Political development of tax institutions occurs when a conflict between institutional actors results in a durable shift in the distribution of tax writing authority. Conflicts occur when the political motives of members of Congr ess lead them to attempt to assert authority in a way that deviates from previously established norms. When these conflicts shift the authority to write taxes and the resulting authority structure becomes the new norm, a political development has occurred.
29 Path Dependence I note that certain tax programs exhibit path dependent properties that play into the political motive to offer distributive benefits, locking politicians into defending certain expenditures to win the favor of individuals or groups who in fluence the outcomes of elections. Paul Pierson (2004) defines a process as path dependent when outcomes at a given point in time are dependent on historical constraints that are the result of an initially random and uninfluenced selection, which set processes in motion that are positively reinforcing over time entrenching those processes and raising the barriers to a fundamental break from the initial path, even if the path is demonstrably suboptimal. This concep t w ill help us to un derstand the nature of the incentives that face politicians in relation to the tax code. Representatives unleash path dependent industrial politica l complexes when they subsidize large industries through the tax code thereby inflating the interest groups that back them These go on to positively reinforce themselves, growing in strength and locking the country into suboptimal outcomes. 2.2 Political Developments in Congressional Tax Committees The fact that the Constitution lodges tax writing authority firmly within the legislature means that the focus of this analysis will be the development of Congress and its tax writing committees. We will begin by outlining some differences between committee s in the two houses move on to discu ss distributive benefits as the causal factor behind development, and conclude by identifying two distinct developmental trends.
30 Characteristics of the HCWM and the SCF There are several key features that make the tax wr iting committees distinct. T he origination clause means that m oney bills are constitutionally required to originate in the House In addition, the leadership structure of the House is much stronger than that of the Senate, a result of the fact that House members are more politically vul nerable than Senators are, (two year terms versus six year terms) and this has two primary effects. The first is that the HCWM has been more able to concentrate the power of the House than the SCF has been to concentrate the power of the Senate, though bot h became prominent committees within their respective houses. Second, because the executive will generally members are more susceptible to executive influence than Senators. Campaign Finance, Special Interests, Tax Regimes, and Distributive Benefits I argue that the rising value of distributive benefits will act as a centrifugal force that encourages the diffusion of tax writing authority as each member of Congres s increasingly fights against any concentration of authority that prevents his or her fulfillment of the political motive to be reelected through the use of those benefits to maintain the support of electorally significant actors. Two developments over tim e have raised the value of distributive benefits, and thus contributed to the development of congressional tax committees which has diffused tax authority. The first such development has been the increased revenue gathering potential of each succeeding ta because the greater the tax burden, the more valuable distributive benefits like deductions
31 and exclusions become. Thus, higher tax burdens will mean that interest groups and influential i ndividuals will find deductions and exclusions more and more valuable, and representatives will be rewarded more for offering them. The second development is that over time, the way campaigns are financed has changed because of developments in campaign fin ance law and due to developments unrelated to any legislation, resulting from technological developments among other things. (Corrado, et al. 2005) These developments have done two things: raised the cost of campaigning, and pu sh ed money progressively farther away from the can didates themselves and the parties that back them. In the face of these developments, representatives have turned to special interests to fund their expensive campaigns. In addition, the rise of issue adver tising has made members more vulnerable to the selective attacks of well financed interests. Thus, campaign finance developments have increased the vulnerability of politicians to special interests even as it has made them more reliant on them for funding, enormously raising their incentive to act on their political motive to be reelected by using distributive benefits to maintain the support of interests. Administrative Capacity and the Diffusion Within in Each House Increasingly valuable distributive be nefits have given members of Congress the incentive to expand congressional administrative capacity. This pattern of development making authority in its tax committees until the 20 th century, when those committees were used to preserve legislative autonomy in the face of an administratively capable executive. During the course of the 20 th century, however, the development of administrative capacity has empowered individual members of Congress rather than just the committ ees, diffusing the capacity to create taxes.
32 Furlong (1968) indicates that the primary function of the HCWM in the early years of its existence was to increase the administrative capacity of the House because it was abl e to more thoroughly and substantively review Treasury reports than the full House. In this way, the HCWM generally wielded the tax writing authority of Congress to the extent that it was able to fend off executive influence. When the members of that commi and file members led them to cede their authority to these few members in order to maintain the primacy of Congress in tax creation. On the other hand, when a given Treasury is aligned with the HCWM, the executive can powerfully project its influence over the House, and in these moments the motives of members was to diffuse the authority of the committee to prevent the executive from wielding influence through it. The stronger leadership apparatus in the House means that the HCWM goes through recurring cycle of boom and bust in its concentration of the authority of House tax writing authority. It will concentrate tax writing authority and power when most members are politically motivated to support this concentration, and lose this authority when it works against the interests of members. Each iteration of this cycle results in the imposition of new rules that leave the HCWM less able to concentrate authority to the extent that it had previously, therefore over time the trend caused by these recurring cycles is toward diffusion of tax making authority within the House, away from the HCWM and t oward rank and file members. Di ffusion of Authority between Houses As noted above, the initial constitut ional constraints meant that within Congress, the House had essentially all tax writing authority for decades after the founding. The
33 rising value of di stributive benefits noted above raised the stakes over tax creation, however, and over time Senators on the SCF increasingly used the amendment power of the upper house to assert tax writing authority, drawing it away from the House. I argue that the risi ng value of distributive benefits to political survival is the primary cause of this development because in the early republic the Senate rarely asserted a significant degree of tax writing authority. The boldness with which the Senate used its authority t o amend increased as the total revenue capacity of the government increased, to the extent that the SCF had about as much tax writing authority as the HCWM by the end of the huge revenue increases in the WW1 era.
34 Chapter Three : An Institutional History of U.S. Tax Authority This chapter will provide historical evidence for the claims made in Chapter Two. s periodization; these five periods serve as the boundary conditions that constrain the actions of individuals in their temporal context and thus affect development in predictable ways In each section, we will examine that several factors cause the value of distributive benefits to individual members to increase, causing a series of related political developments in the tax making institutions.
35 1. Chapter Outline Part 2 covers the early colonial period up until the outset of t he Civil War. In this period two different tax regimes served as the context for institutional development separated by the revolutionary crisis that began with the outset of the Revolutionary War and ended with the signing of the Constitution. In this period the tax making authori ty within each house of Congress, especially in the House, was concentrated by committees and chairs. Between the branches of government, the executive had predominant tax writing authority, and the House was dominant within Congress. Part 3 covers the per iod from the Civil War until the passage of the Underwood Tariff Act in 1913, which established modern federal income taxation. The political incentive of Congress members to use distributive benefits spiked during this period as a combined result of the e nd of patronage and the sustained revenue increases of the Civil War tax regime which was in place throughout the antebellum period and into the early 20 th century. Within each house of Congress, committee s continued to enable representatives to enhance co ngressional administrative capacity, and continued to concentrate the tax writing authority of Congress. Between the different branches, the execu tive maintained primacy but the increase in legislative capacity to write taxes increased its relative authori ty. Part 4 covers the period beginning with the 1913 passage of the first modern federal income tax, the diffusion of tax writing authority from the House to the Senate came to be a permanent aspect of the budgeting process, and remaining executive influence saw a further decline as the expansion of administrative capacity in Congress enabled the writing of complex tax mechanisms in the legislature. This section will
36 demonstrate that these developments were driven by dramatically increased political incentives of i ndividual members to write distributive benefits into tax legislation. These benefits became valuable due to the high tax burden of the two income tax regimes and associated rise of p rofessional lobbying, the increasing cost of campaigning, and the path de pendent nature of income tax expenditures. Part 5 is an analysis of the effects of the Watergate scandal and ensuing reforms An ongoing trend toward higher campaign costs and the passage of campaign finance reforms had the effect of making politicians m ore reliant on special interests and vulnerable to their attacks, thus raising the value of distributive benefits significantly. The urgency of the reform movement gave r ank and file House members the pretext to scatter the concentrated authority of the Mi lls committee to gain greater access to more valuable tax benefits Congress also dramatically expanded its administrative capability and made this capability available to rank and file members, decreasing the utility of the tax writing commi ttees to Congr ess and decreasing their ability to provide legislative leadership. Part 6 will cover the counter factual case in this study which we will use to qualify the postulation that any lasting change in the tax code must involve development in one of the institu tions that create it The 1986 tax reform brought the code closer to principles of fairness and equity than they had been in decades, yet the institutions that channel the expression of political self interest did not undergo any significant development, a nd the reforms did not induce development. Thus, representatives continued to express their political motives as they had before the reform, with the result that the code has largely reverted back to pre reform complexity, inefficiency, and inequity.
37 2. T he Early Regimes 1789 1860 The early period in the history of U.S. tax policy wa s characterized by domination by the executive of tax writing authority, with the HCWM centralizing the authority of the House and establishing some congressional influence on a process then dominated by the executive The incentive to increase the administrative capacity of the House led to the concentration of tax writing authority in the HCWM. The value of distributive benefits remained low during this period, and thus the political motives of members of Congress were not aligned behind the diffusion of authority. 2.1 Boundary Conditions: The Two Tax Regimes of the Early Republic The Pre Federal Tax Regime The first tax regime used in the United States was very similar t o that used by the colonies before the Revolution, and thus common taxes used in Britain at the time, namely property taxation, came to be used as primary means of taxation in America. In this period, the level of taxation was very low. The state legislatu res experimented with a variety of tax mechanisms inherited from the British, including the taxation of imports and exports, excise taxes on certain goods, property taxes, and various other methods. (Brownlee 2004, 14 15) The result was a heterogeneous mixture of differing types and levels of taxation across the country in which taxes were raised according to variable needs that were specific to a certain region or locality. The Revolution initially affected taxes by forcing states to dramatically ramp up revenues using their preexisting tax mechanisms. Borrowing from British tradition, most
38 relied on increased property taxation, a very progressive measure (Brownlee 2004, 15) The gove rnment under the Articles of Confederation did not fundamentally alter the tax system; before the new government was established, states gathered revenues through various taxes and contributed them toward the national government (in the form of the Contine ntal Congress) at will, and after the government was established the system was exactly the same, because the central government had no way to force any state to contribute to national coffers. The Early Federal Tax Regime Brownlee states that the first tax regime of the U.S. government was overwhelmed by a protracted revolutionary crisis that began with the dramatic expenditure increases necessitated by the Revolutionary War, and ended with the establishment of a new tax regime in the ratification of th e Constitution. The use of a national system of property taxation was a popular idea, but the Constitution prohibited such direct taxation unless it redistributed the funds gathered proportionally back to the states. Thus, this early institutional limitati on fundamentally changed the federal tax structure for over seven decades; the government relied primarily on tariffs at relatively low levels and on sales of public land to individuals for early revenues, a system which was sufficient to pay down the debt and to finance the relatively limited needs of the federal government for the first half of the 19 th century (Brownlee 2004, 13)
39 2.2 Institutional Developments and their Effects on Political Motives In this period, the motive to use distributive benefits was minimal. The low tax burden did not push individuals or groups to mount significant lobbying efforts, and the nature of campaigns throughout the period meant that the political motive not directed toward rewarding special interests. Distributive Benefits in the Context of Early Regimes and Insular Campaigns The revenue schemes of the first two regimes were characterized by a low tax burden through indirect taxation. In this con text, the value of privileges within the tax code are comparatively low, and interest group lobbying will be limited. In addition, individual representatives were able to rely on relatively insular funding sources that did not force them to seek funding fr om outside sources. Corrado et al. (2005, 8) note that campaigns in this period were characterized by low costs and insular funding sources. The early decades after the founding saw campaigns for public office domin ated by individuals who were able to finance their own campaigns. As running for office became a pursuit of a more economically diverse set of people in the early 19 th century, party structures built up to fund campaigns to control outcomes in government, growing larger with revenues from assessments, (fees collected by parties from appointed officials) in a system of patronage that characterized party politics for most of the 19 th century. In the context of this analysis, it is pertinent to state that the patronage system dominant throughout this period facilitated an insular financing system in which parties drew funds from within the ranks of their appointed civil servants,
40 E xecutive Advantage in Administrative Capacity In the early government, the structure of institutions meant that the executive was structurally better positioned to develop coherent t ax policies than Congress was, and this made members of Congress political ly motivated to create a formal division of duties which would stimula te specialization and expertise; thereby enhancing administrative capacity. The First Congress established the Treasury in 1789, choosing at first to use the Secretary as a more reliable and efficient liaison to the executive than a shifting committee would be. Representatives rejected the 1789 proposal to institute a Ways and Means committee by members who had experience with such committees in legislatures at the state level (Kennon and Rogers 1989, 25 27) F rom 1789 1795, the Treasury and its Secretary, Alexander Hamilton, essentially wrote all money bills by drafting estimates of revenues of appropriation that were generally adopted without much mo dification. This lack of assertion of creative authority by the House despite its constitutional prerogative is attributed to the fact that a large body like the House will be less able to make substantive modifications to money bills without any specializ ation and associated development of expertise (Furlong 1968, 599 600) 2.3 Political Developments and the Concentration of Tax Writing Authority The Creation of Congressional Tax Writing Committees
41 of the HCWM and the SCF, and durably shifted tax creation authority away from the exe cutive and gave Congress creative influence despite its administrative disadvantage. influence, worrying that he was less a congressional agent in the executive and more of an executive agent in the legislature. (Kennon and Rogers 1989) artisanship, the desire for the House to assert its constitutional role in public finance, and the movement to make House procedure more efficient all contributed to the establishment of the standing Commi ttee of Ways and Means in 1795 thereby ending t he brief period of executive influence (41) The Senate followed suit with the creation of a Committee on Finance, and both committees were formally enshrined as standing committees early in the 19 th century. First Authority Cycle of the HCWM The early respect the HCWM was given within the House as a standard bearer of legislative autonomy allowed its chair to accumulate a great deal of authority over tax writing authority and authority over House business. T he committee developed such that it gained authority over both revenue and appropriations, and used its initial clout to concentrate authority until its first bust in the early 19 th century. The committee was able to concentrate almost complete tax writin g authority and significant authority over the House in the context of an underdeveloped leadership apparatus. (Kennon and Rogers 1989) John Randolph (chair from 1801 1807) used this authority to the fulle st extent, controlling on taxes to push some executive proposals and reject others at will In the undeveloped
42 party apparatus of the House, he was able to effectively serve as majority leader, and used his influence to ensure the p economic proposals, but he was just as able to prevent passage as he was to ensure it, and exercised his authority often (Kennon and Rogers 1 989, 65) Randolph used his power to control the House rather than to forward its interests as a whole against the executive, and this led to a successful revolt against him, which involved President Jefferson using the force of his office to attempt to unseat Randolph. This attempt was successful because it gained traction with members of HCWM authority to obstruct legislation pushed by a significant portion of his party in both the legislature and the executive diminished the reputation and influence of the committee for a long period after his defeat (69) Creation Authority For most of this period, the Senate followed the lead of the House on tax matters, with the SCF exercising little creative authority. However, due to partisan conflic t between the two institutions in the context of a bicameral legislature, the SCF made its first assertions over creative auth ority at the end of this period, which had insignificant effects on development in this period but set a precedent which would be very important after the Civil War. After the disintegration of the Whig Party, Democrats controlled the government until the establishment in 1854 of the Republican Party. Republicans came to power in the House in election years preceding the Civil War b ut Democrats maintained control over the senate. Because party differences over tax policy were vast, Democrats in the
43 SCF asserted authority over taxes, pitting one house of Congress against the other in making mend, altering Republican bills to a greater extent than had been common in the past (Kennon and Rogers 1989, 141) 3. T he Civil War Regime 1861 1912 The political incentive of Congress members to use distributive benefits spiked during this period as a combined result of the end of patronage and the sustained revenue increases of the Civil War tax regime which was in place throughout the antebellum period and into the early 20 th century. These shifting incentives caused three major political developments: increasingly strong committee chairs reasserted control over the tax writing power of House, the Senate made increasingly frequent and bold assertions over tax creation authority, and spe cial interests boosted the administrative capacity of congressional tax writing committees, which further enhanced committee authority and undermined the administrative advantage which remained the source of executive tax writing authority Thus, in the go vernment as a whole, authority over tax creation shifted from the executive to the legislature. Within Congress, authority shifted from the House to the Senate. Within each house of Congress, authority became centralized within committees as special intere sts supplemented their administrative capability.
44 3.1 Boundary Condition: The Civil War Regime (2004) Civil War regime was initiated by onset of the Civil War, which required the initiation of huge new spending programs. Even as the urgency of revenue needs overwhelmed the capacity of the early federal regime of low tariffs, the withdrawal of Democratic opponents of protectionism (in line with the interests of the plantation economy, which reli ed on exports) allowed Republicans to pay for the war using their preferred mechanism: higher tariffs. drew revenue from very high tariffs on imports and from excises on goods such as tobacco, alcohol, and play ing cards. Governments in this regime used the revenue to support the Republican agenda of nation building, improving infrastructure and strengthening institutions to improve interstate trade and encourage capital investments, and also for purely political programs to broaden their political base, namely the extensive pensions pr ogram for Union veterans. It remained popular because the spending programs enabled by the tariff regime were very strong political mainstays. Be nefits to investment won industrial support in northern cities, tobac co and alcohol excises appealed to public sensibilities and gave related industries m uch needed credibility, and Uni on pensions rounded off the coalition among northerners by adding poor and working class voters to the rank s, boosting their support despite the regressive structure of the tax schemes (Brownlee 2004, 37) This regime remained firmly entrenched into the early years of the 20 th century, at which point a movement for federal in come taxation began to undermine it.
45 3.2 Institutional Developments and their Effects on Political Motives The value of distributive benefits in this period increased dramatically as a result of the higher tax burden of the new regime, the end of patron age and associated shift in campaign funding from parties to special interests The Tax Burden of the Civil War Regime The dramatically increased tax burden and the regressive structure of the tax burden made distributive benefits much more valuable to special interests, and thus politically motivated representatives were increasingly attracted to the utility of exclusions and lower rates in tariffs and excises in increasing their electoral viability. The high burden led representatives to offer very valuable lowered rates within the tariff schedule for certain industries in return for support in elections. Reliance on regressive tariffs made it valuable to representatives to provide benefits to their district to maintain political power. It was in this period that the term was coined, describing spending originated in this period as a way for the Republican Party to maintain its political power, allowing Republican representatives to grease the po litical wheels in their home districts, distracting from the very regressive skew of the tax regime (38) Campaign Finance Developments C orruption within the Grant Administration led to the passage of the Pe ndleton Civil Service act, the first significant campaign finan ce law in U.S. history, which ended
46 patronage and significantly altered the way parties and interest groups worked to influence political outcomes (Corrado, et al 2005, 10) P atronage era parties had previously establishe d insular sources of funding in which the party would appoint officials who would then send payments to the party from their government paycheck. They certainly relied on industrial and corpo rate interests for funding, but it was not their primary source until after these reforms made the primary source of party funding illegal. (Corrado, et al. 2005) A fter this juncture parties had to work to win t he allegiance o f powerful and well financed interests w hich could underwrite their campaigns Interest Groups Boost the Administrative Capacity of Tax Writing Committees As interest group lobbying intensified and members of Congress relied on them more for campaign funds and because congressional administrative capacity was very low, members of Congress came to rely on these interest in drafting tax legislation. Interest groups developed a sophisticated professional class to supply representatives with technical info rmation that they did not have access to previously (Kennon and Rogers 1989, 176) I ntere st groups targeted their efforts at the two tax writing committees. It especially focused on the SCF, which proved more receptive to influence as a result of the weaker leadership structure of the Senate (Kennon and Rogers 1989, 214) This targeted effort meant that the technical expertise interests provided greatly boosted the administrative capacity of the tax writing committees.
47 3.3 Political Developments and the Concentration of Tax Writing Authority Committees centralized authority as the experts who were able to draft the useful tariffs which were able to aid many re presentatives. Between houses of Congress, the Senate made increasingly bold use of its amendment power, diffusing authority between houses of Congress. 3.2 The Civil War Authority Cycle in the HWCM and other Developments By the outset of the war, virtua lly all taxing and spending authority was controlled leadership in the House, with chairman Thaddeus Stevens serving as the primary source of power and influence for those se eking political advancement. Stevens chaired the committee for the duration of the war, and used his immense authority to control the House and push through necessary legislation. His efficiency in the use of the potent power of his office with the backing of Secretary Chase and the Lincoln Administration caused concern among rank and file members at the degree to which power had been concentrated in the committee After the war, this feeling among House members, combined with the practical need to lessen t workload, led to a congressional revolution after the war which carved up the (Kennon and Rogers 1989, 142) The Senate followed suit in stripping the SCF of its authority a year later. After the war, several important developments occurred as a result of partisan competition within the context of a bipartisan legislature. As the initially vast Republican majorities slowly diminished and Democrats returned to control of Congress periodically
48 around the turn of the 20 th century, Republicans used their early control to diminish the ability of the minority to slow down legislation favored by the majority. Using the newl y established Rules Committee, (composed of the Speaker and the chairs of the HCWM and the Appropriations Committee in the majority along with two minority members) they instituted rules that centralized control in committee chairs and in the Speaker (Kennon and Rogers 1989, 185) Thus, HCWM authority was circumstantially enhanced as a result of partisan efforts to retain control over the House. As distributive benefits became more valuable in the context of two different parties controlling the different houses of Congress, Senators began to assert more upper house proved more receptive to specia l interests, with the SCF serving as a focal point for lobbying (Kennon and Rogers 1989, 227 228) The long dominance of protectionists in both houses of Congress for decades following the Civil War meant that the Sen ate had no need to enhance its comparatively small role in tax creation despite the fact that it was becoming more valuable to have that role. Beginning in the 1890s, however, Republicans and the minority of Democrats who advocated for protectionism slowly lost hold of Congress. This coalition first used the rules changes mentioned in the previous section to prolong the potency of their power, then when they were relegated to the Senate they began to amend bills with increasing frequency to maintain at leas t some control over tax outcomes. This conflict, which lasted roughly three decades from 1890 to 1920, caused the Senate to assert a lasting authority over tax writing. (Kennon and Rogers 1989, 228)
49 In some cases, these a mendment processes modified bills to the point where they were hardly comparable to the original House bills. In this way, the Senate forced a significant portion of the work of tax creation into the conference process, where Senate leaders would work with increasing effectiveness to bring the final legislation as far from the House version as possible to adhere more closely to Senate bills. By the time of the Republican takeover of Congress in 1921, the SCF had attained enough authority that even though bo th Houses were firmly ideologically aligned, it was able to heavily influence the shape of the corporate liberal backlash by modifying the bills that rolled (Kennon and Rogers 1989, 227 228) 4 T he Income Tax Regimes 191 3 1959 In this period, the diffusion of tax writing authority from the House to the Senate came to be a permanent aspect of the budgeting process and remaining executive influence saw a further decline as the expansion of administ rative capacity in Congress enabled the writing of complex tax mechanisms in the legislature This section will demonstrate that these developments were driven by dramatically increased political incentives of individual members to write distributi ve benefits into tax legislation. These benefits became valuable due to the high tax burden of the two income tax regimes and associated rise of professional lobbying, the rising cost of campaigning, and the path dependent nature of income tax expenditures
50 4.1 Boundary Conditions: The WW1 Regime and New Deal Regime The Establishment of the WW1 Regime Beginning with this economic contraction of the late 19 th century and gaining formidable momentum into the 20 th the popular movement in favor of income taxation put increasing pressure on the government. Federal income taxation became a plank of the Democratic Party, which was eager to regain control of government for the first time since the Civil War. By the outset o f WW1, the popular movement toward income taxation was in full swing, the political coalition that had supported the regressive tariff regime was buckling under popular and partisan pressure, and proposals for dramatic reform were being thrust into the pol itical mainstream (62) The election of 1912 gave Woodrow Wilson the presidency and reinstated Democratic majorities in both houses of Congress. The ratification of the 16 th Amendment in early 1913 provided g round upon which the movement co uld proceed at a federal level. Later that year, Congress passed the Underwood Simmons Act with a surprisingly little resistance. A long with dramatic reductions in tariffs and excises, it contained an inauspicious provision for income taxation that was not actually intended to be the primary source of federal revenue (Kennon and Rogers 1989, 252) As Brownlee notes, income taxation may not have become the basis for federal taxation had his torical circumstance not impacted the situation. The crisis of World War One led necessitated a 2454% increase in federal expenditures from 1916 1919, a rate of increase not matched before or since (252) De mocrats presided over this unprecedented expansion of revenue cap acity by historical chance; if the Republicans had been in power they could have used the opportunity to purge the Underwood Simmons code of the income tax provision or to
51 avoid relying on t hat provision as the primary source of war financing. As it happened, Democrats were in power in every branch of government and able to use the political flexibility of the crisis to engrain a democratic statist ideology into the largest revenue mobilizati on in US history (Brownlee 2004, 58) Democrats under Wilson and key to in their wartime financin g scheme, in which an income tax fe ll on the rich almost exclusively, more than offsetting the regressive excise taxes which were also used. By the time Democrats were ousted from Congress and the White House after the war, the popularity of this entirely new regime had been demonstrated, a nd a return to the system of high tariffs would prove deeply unpopular, as demonstrated by the reaction to the Smoot Hawley Tariff Act of 1930 (Kennon and Rogers 1989, 261) The Establishment of the New Deal Regime Th e Democratic Party presided over another tax regime shift under the leadership (1997) framework who used the constructive force of his executive power to forge a stable new regime by the end of the war. Unlike previous regime shifts in which the executive both initiated and molded the new regime, in this case all related institutions recognized a stake in the new regime and worked to shape it to enhance th eir authority within the modified network of institutional relationships. The onset of the Great Depression provided FDR with the mandate to propose radically progressive new taxes to take advantage of a new willingness of the American people to entrust th e government with the responsibility to manage employment levels and actively employ tools at its disposal to regulate economic cycles in order to minimize
52 hardship. (Brownlee 2004, 102) Despite significant opposition a nd the failure of the most ambitious legislation, FDR and Treasu ry Secretary Henry Morgenthau were able to establish a precedent for using progressive income taxation to expand revenues, which influenced the WW2 financing legislation (Brownlee 2004, 114) With two revenue bills in 1942 and 1943, Congress established the federal revenue structure that continues to hold to this day: reliance on progressive and broad based income taxation and flat rate corporate taxation for general revenue, and regressive payroll taxes to fund social insurance programs (Brownlee 2004, 121) The need to maintain the support of upper middle and middle class earners meant that tax dedu ctions were just as integral a feature of the New Deal regime as broad based taxation. These were used to blunt the progressive thrust of the taxes, and to reduce the severity of the high er rates. Kennon and Rogers note that tax writing committees recogniz ed the political potential of tax expenditures and established them as a core feature of the New Deal regime, which established a precedent which would serve to channel the expression of political motives by Congress members. The post war decades witnesse d the partisan conflict that had been raging for a century between corporate liberalism and democratic statism recede as a new conservative coalition emerged, in which both parties abandoned the pursuit of soak the rich taxation and accepted lower effectiv e tax rates(on the part of southern Democrats) in exchange for the acceptance of income taxation and avoidance of a push toward regressive consumption taxation, (on the part of Republicans) instead converging on a more conservative, corporate liberal artic ulation of the New Deal regime (Brownlee 2004, 122) This harmonious relationship on tax policy allowed deliberations over tax
53 legislation to remain nonpartisan, and allowed for the maintenance of high personal and corp orate tax rates until the tax reforms of the late 1970s and 1980s (124) 4.2 Institutional Developments and their Effects on Political Motives The institutional developments of the period channeled the expression of the political motive to be ree lected toward increased use of distributive benefits. Starting in the late 1950s and 1960s, the cost of campaigning for federal office began to rise dramatically, thus increasing the reliance of members on outsid e money to be reelected. Simultaneously, the dramatic increase in the federal tax burden gave lobbies the incentive to invest more into the political system offering greater rewards and threatening more significant reprisal Professionalization of the Tre asury and the resulting executive influence raised the incentives of Congress members to increase administrative capacity in the legislature. Finally, path dependent properties of tax expenditures increased the size of initially insignificant deductions an d over time these processes have entrenched certain provisions politically. The Tax Burden of the Income Tax Regimes The total tax burden of the WW1 regime was higher than that of the Civil War regime, and the New Deal regime increased the burden even fur the r, to roughly today level as a percent of GDP T hese successive increases made privileged positions within the code much more valuable, causing an explosion in the already established profitable as every dollar spent to influence tax legislation yielded much more than it had previously.
54 Campaign Finance Developments Campaigns became much more expensive in this period even as parties became less able to support them, making politicians much more dependent on outside money. Campaign financ e laws pushed money away from candidates and the party committees that supported them, causing funds to flow into independent expenditure groups which increased the vulnerability of members to special i nterest attacks. Both of these developments channeled the political motives of Congress members toward the offering of distributive benefits to win the support of powerful individuals and groups and to appease interest groups to avoid The cost of running for federal office rose dramatically as the price of running ads on new media was significantly higher than it had been historically, and as the need to reach a wider audience increased. In addition, campaigns came to be supported less by the party than th ey had been previously, instead becoming more candidate centered (Corrado, et al. 2005, 18 19) An explosion in spending at the turn of the century culminated in a major scandal in the election of 1904 (Corrado, et al. 2005, 11) Progressives enacted a series of reforms to limit contributions to candidates by individuals and party committees and to require disclosure of contributions, but there early enforcement mechanisms were not strong and these limits and requirements were widely flaunted (13 15) Later in the period, c ampaign finance legislation that was passed as a partisan effort to limit the influence of organized labor had the unintended effect of giving unions the incentive to establish Political Action Committees (PACs), which accepted independent donations and spent them on campaigns as a way to get around the ban on direct contributions from the funds of
55 individual union s (Corrado, et al. 2005, 17) These groups were a tool initially used mostly by labor, but business interests began to use them in the 1960s as well. The effect of this development was to make individual politicians more vulnerable to special interests as these well funded issue advocates began to pour money into campaigns in targeted efforts to remove hostile politicians where they were vulnerable. The Professionalization of the Treasury The administrative capacity of the Tr easury increased significantly during this period as a part of pushes by Wilson, FDR, and their Treasury Secretaries to construct complex new tax regimes. The executive was able to leverage this expertise to gain influence over the tax writing process, and this influence gave newly gave politically motivated members of Congress the incentive to expand administrative capacity in Congress, the effects of which wil l be discussed later in this section. In the Wilson Administration, Secretary William McAdoo worked to transform the department into a large bureaucracy with hugely enhanced administrative capa bilities. He pioneered bureaucratic professionalization creat ing a class of specialists who could devise the more complex systems that the circumstances demanded (Brownlee 2004, 70) The Treasury developed a network of expertise by people in Con gress, the business community, academia, and tying them together to a process that involved the development of an expert bureaucracy (71) E xpertise within the Treasury translated into enhanced influence over the tax writing process. When President Wilson demanded revenue from Congress to finance the war, Chairman Underwood of the HCWM relied on the expertise of the Treasury and was
56 receptive to the recommendations of President Wilson in pushing the major revenue raising bills (Kennon and Rogers 1989, 248 250) When Republicans returned to power after the end of the war, the underdeveloped staffs of the congressional committees were much less able to handle the task of devising a way to stay within the new WW1 tax regime while rolling back the aspects of the WW1 regime that were more disagreeable to conservatives. Thus, for all three of the Republican adm inistrations of the 1920s, Secretary Andrew Mellon used the administrative capacity of the Treasury in the context of underdeveloped Congressional staffs to take a leadership role in the corporate liberal articulation of the tax policy in the new regime (260) He worked to moderate the reactionary assault on the tax code, urging fellow Republicans to adopt a less radical form of income taxation in order to fend off more radical proposals that were coming from the left and to settle at something that would prove acceptable to both sides (Brownlee 2004, 77) Mellon also advocated for the articulation by the Treasury of economically principled and objective policy. Despite the fact that this expertise was influenced by a more conservative idea of what was efficient, (and was partly the result of a desire to insulate the Treasury from the influence of future Democratic administrations) the Treasury nonetheless came to articulate a more comprehensive and economically coherent vision for federal taxation and appropriation in this era (78) This advocacy of theoretically pure taxes continued throughout this period by the 1960s econom ists in the Treasury, led by Stanley Surrey, began advocating for a reconciliation of the income tax code with the Haig Simons definition of income.
57 Path Dependent Properties of Major Tax Expenditures As Congress members granted exclusions, deductions, and preferential rates to interests to ensure their continued reelection, they actually worsened the political pressures applied to them by setting path dependent processes in motion. Many tax policies exhibit common features of path dependence that Piers on (2000) establishes: provisions may have been insignificant in their original form, but were positively reinforcing over time as the subsidized industry became bloated, which led the industry to invest back into the political system to expand the subsidy, which f urther bloated the indust ry, and so on. Over time, the barriers to switching paths rise as beneficiaries become dependent on continued subsidy and as the lobbying group backing the given subsidy continues to grow. As a result, these initially innocuous pro visions have significantly altered the structure of the economy and the allocation of capital therein, even as it has precipitated the political entrenchment of inefficient subsidies. The home interest deduction is a primary example of a tax expenditure t hat has grown wildly past original expectation or intention, and which involves positively reinforcing processes which raise barriers to repeal. The home interest deduction had its origins in the 1913 Underwood Tariff bill, which made all interest deducti ble. This was not a conscious institution; the HCWM inserted the provision out of a desire to protect small businesses from the new income tax mortgages were hardly used at all during this period, and personal access to credit was limited (Lowenstein 2006, 2) It was protected by Congress as a part of the political coalition building in the tax legislation that established the New Deal regime (Brownlee
58 2004, 116) Use of t he deduction expanded rapidly as t he G.I. Bill and the establishment of Fannie Mae (providing secure and affordable mort g ages) boosted home ownership to the extent that by 1960, 60% of Americans owned their homes, and a majority of those had mortgages and thus relied on the deduction. Gruber (2011) notes that the deduction encourages over allocation of capital by approximately one dollar for every dollar of subsidy, thus this deduction has inflated housing prices. On the aggregate, this has resulted in an enormous inflation in the housing industry and every associated industry, meaning that millions of realtors, construction workers, and workers in a variety of other service industries aimed at homeowners now have an interest in the continued existence of the deduction. In addition, the removal of the deduction would do real harm to average citizens who would see their home prices drop in the capital drain that would follow. Thus, an initially minuscule deduction has created a positiv ely self reinforcing process that has decreased economic efficiency and raised the political motives of politicians to continue to support its existence. 4.3 Political Developments and the Diffusion of Tax Writing Authority The rising value of distributive benefits in this period meant that the Senate came to assert coequal status in tax creation, completing the diffusion of authority across the two houses of Congress. Despite rules changes which permanently undermined the ab ility of HCWM chairs to occupy leadership positions in the House, the strength of committee chairs and the continued usefulness of the tax writing committees as boosters of
59 administrative capacity meant that they continued to be able to concentrate the tax writing authority of Congress Congressional Backlash against Chairman Underwood Rules allowing for strong chairs, control over appointment power in the House, and access to administrative capacity of interest groups meant that the HCWM was at an all time peak of authority over tax creation and control over the House when Oscar Underwood was appointed chair of the committee. He became the most important authority figure in the House, even more so than the Speaker at the time, and he could use the power of this committee to control the flow of almost all bills that went through the House, a result of the fact that he effectively assumed most roles of House leadership (Kennon and Rogers 1989, 215) In devising increasingly c omplex tax legislation, Underwood and the committee relied on the much greater technical capability of the Treasury. Underwood was seeking higher political offices in his career (he was later elected to the Senate and served as majority leader there in the 1920s) and made full use s clout to project executive influence, without regard to the long term maintenance of committee authority. The fact that Underwood had used his power to control the House almost completely, and even worse, that h e had used this control to submit the House to executive influence, led to a post war revolt against the committee. First, in an effort to ensure that future HCWM chairs could no longer dominate the movement of legislation on the floor that was not related to its jurisdiction over revenue, party rules changes in the control committee appointments and use this as a bargaining chip was severely
60 diminished as well, as change s to the Committee on Committees forced the HCWM chair to share leadership of the committee with the majority leader and Speaker (Kennon and Rogers 1989, 218) In addition, the firm entrenchment of the seniority system by 1915 further diminished the political importance of the power over appointment. The Southern Democratic HCWM and Concentration of Tax Authority Following the WW1 era rules changes and expansions of administrative capacity in Congress, tax writing comm ittees continued to serve to provide Congress with access to distributive benefits and to push off executive influence, for the first time establishing Congress as consistently dominant over the executive. The firmly entrenched seniority system and prolong ed Democratic control of Congress allowed for a continuity of conservative Democratic leadership of the HCWM. Important developments that resulted from stability of the first part of this authority cycle were the formative influence that the committee was able to have on the creation of the New Deal regime, and resulting authority niche that it was able to carve. It also expanded congressional staff to assert legislative autonomy. Democrats controlled Congress for most of this period, with majorities in bot h the House and the Senate from 1933 1981 in every Congress but the 80 th (1947 49) and the 83 rd (1953 55) and this stable control combined with the firm entrenchment of seniority meant that only three democratic chairs served on the HCWM during this entir e stretch of time: Robert L. Doughton served through the Roosevelt and Truman administrations, Jere Cooper served a brief stint of just under two years before his untimely death, and Wilbur Mills took over in 1957 and served through the remainder of this p eriod and into the 1970s. Seniority also meant that despite the fact that the Democratic Party caucus became
61 much more liberal as a whole over this stretch of time, it was the more conservative southern Democrats who had dominated the party in the 1920s an d early 1930s who assumed most of the important leadership positions following the Democratic resurgence (Kennon and Rogers 1989, 273) This conservative element meant that the committees were never fully aligned with even Democratic presidents in this period. The result of this was a steady stretch of HCWM consolidation of authority for this entire period because the chairmen were able to use their power as a check on executive influence. This was an important part of the much of what he wanted in early New Deal tax legislation, he did not experience a congressional revolt because he also asserted legislative autonomy over the budget in t he later years of the Depression and during WW2. He worked to blunt the progressivity of tax legislation proposed by the Roosevelt and Truman administrations, limiting the degree to which tax legislation relied on taxes on the wealth and on corporations (Kennon and Rogers 1989, 305) for the committee a reputation for sound, thoroughly vetted bills, using consensus within his committee, bargai ning with congressional leaders to slide bills through Congress intact under closed rules (no amendments), and distributing rewards to maintain influence (Kennon and Rogers 1989, 325) This made his committee very productive and gave legislation he reported a good track record in the House. This position allowed Mills to continue to consolidate authority as a way to stave off executive influence. Toward the end of this period, however, the Mills committee exercised tight control over the process
62 of writing and passing bills and shut out the growing liberal wing of his caucus, contributing full swing by the end o f this period (352) As a part of the effort to assert legislative autonomy, Doughton and Mills encouraged the expansion of administrative capacity in the House in order to keep up with the executive, where committee used the staff of the Joint Committee on Taxation (JCT, named Joint Committee on Internal Revenue Taxation before 1976) to maintain the ability to actually write the tax code as it became i ncreasingly complex (Kennon and Rogers 1989, 345) The formative bills of the New Deal Regime were the Revenue Acts of 1942 and 1943, and the details of the latter were completely in the hands of HCWM and Congress beca been overridden in history. This action was a mark of the tax writing authority that Cong ress had gained in relation to the executive in its expansion of administrative capacity, and ensured that Congress had a formative influence on the new tax regime because it was able to completely throw off executive influence in passing one of its format ive acts (Kennon and Rogers 1989, 305) This congressional influence fundamentally altered one of the primary three progressive; it would also be broad based because the committee relied more than FDR would have liked on lowering exemptions rather than increasing taxes further on corporations or the wealthy (Brownlee 2004, 115) In addition, the committee s ensured
63 that they would have significant control over a politically potent new pillar of the regime: social insurance legislation. During this period, the HCWM and SCF ensured that Social Security, Medicare, and Medicaid were firmly within their purview, and drafted bills to create and modify each program (Kennon and Rogers 1989, 345) The HCWM and SCF also saw and took the opportunity to normalize the use of deductions and exemptions in the new regime as a way of win ning the support of middle and upper class constituents. Actors on these committees saw that these deductions would give them massively enhanced political power as they became able to initiate what amounted to entirely new spending programs within the tax code without going through the politically risky process of initiating direct spending programs. They used their expert staffs to devise complex mechanisms that they could offer to special interests (Brownlee 2004, 130) The Senate Establishes Equal Authority over Tax Outcomes As a result of the incentives structure created by the increased tax burden and the changing incentives of campaign finance in the context of a bicameral legislature, the S enate asserted coequal a uthority over tax creation using its power of amendment in the first decades of the 20 th century During the leadership of Chairman Mills, the SCF was less successful in conference than they had been, but the active practice of extensive amendments continu ed to force some tax creation into conference. The prima ry contributor to this assertion of authority was the fact that in the face of the stability and increasingly tight control of the tax writing process by the HCWM, interests found that Senators were more receptive to their influence and directed their
64 efforts accordingly (Kennon and Rogers 1989, 330) This resulted from the peculiarities of the SCF as an institution; the fact that instruments of Senate leadership are weaker has always prevented the SCF from concentrating the tax writing power of the upper house to the degree that the HCWM had been able to. Thus, whereas Chairman Mills was able to interest on tax legislation, his SCF counterparts were unable to exercise this limit. Th us, Senators had the incentive to enhance their individual political power by continuing to push their right to amend in spite of the origination clause and were able to jump at the opportunity. The influence of special interests was apparent when one obse rves which specific tax areas the Senate made greater efforts: on tax legislation and trade bills (in which interests had a financial stake) the Senate predominated in conference, whereas the House predominated on Social Security matters (Kennon and Rogers 1989, 330) Social Security had proved very popular and thus few representatives saw political use in opposing it, in addition to the fact that interests (including a network of experts who had developed theoretical de fenses to ward off attacks to the system) had actually aligned behind it rather than against it (Brownlee 2004, 126) 5. Watergate Reforms and D iffusion of Congre ssional Tax Authority 1960 2013 In this period, a wave of public discontent that peaked with the Watergate scandal significantly altered authority structures over the tax code. Within the continuing constraints of the New D eal re gime, the political value of distributive benefits to
65 Congress members increased dramatically as a result of the increasing cost of campaigns and the rise of issue advocacy spending as legislation continues to push campaign money away from candidates and p arties and toward the periphery of PACs after FECA and Super PACs after the BCRA and Citizens United These shifts in the institutional channeling of political motives led to four political developments Three were a direct consequence of congressional ref orm in the House which dramatically enhanced legislative administrative capabilities and imposed rules that both diminished the authority centralizing power of committee chairs and ensured greater access of rank and file members to the budgeting process. The fourth development was the institutionalization of the coequal status of the Senate in tax creation. These four developments have scattered tax authority both across the two houses of Congress from the House to the Senate, and within each house away fr om committee chairs and toward individual committee members and rank and file members. 5. 1 The Watergate Juncture Sets the Stage for Development The assassinations of transformative figures in Martin Luther King and John and Robert Kennedy, the ongoing and undeclared Vietnam war, and the general perception that Congress was incompetent and the presidency had become too powerful had all contributed to a growing dissatisfaction with government among Americans (Kennon and Rog ers 1989, 351) The Watergate scandal and its dramatic culmination in 1974 unleashed the force of public opinion in a full fledged wave of discontent that swept a much greater proportion of incumbents out of office than usual. This wave of public sent iment lent a sense of urgency to the situation, and effectively shook up institutional
66 authority structures, allowing actors to take advantage of the resulting political flexibility of the situation to make significant changes. 5.2 Institutional Developme nts and their Effects on Political Motives FECA, the BCRA, and Modern D evelopments in Campaign Finance The reform movement affected campaign finance as well, leading to the passage of the Feder al Election Campaign Act (FECA). This act had the effect of s trengthening the preexisting regime with enforcement mechanisms which the progressive era reforms had lacked. The strengthening of preexisting legislation meant the solidification of the trend toward increased reliance on special interest donations (notabl y PACs, which grew enormously by this period) by both individual politicians and the national party committees that supported them. Newly stringent enforcement of limits on direct donations to parties and candidates and of spending limits on individual ca funds that the parties received from PACs and spent on issue advertising that would help their candidates without exceeding direct spending limits. Widespread dissatisfaction with the growth of soft money spend ing in the 1990s led to the 2002 passage of the Bipartisan Campaign Reform Act (BCRA) which regulated donations by PACs to parties. The law contained a problematic provision that attempted to limit spending on issue advertising even if it was not explicit ly supporting a specific candidate. Opponents of this provision charged that it violated the 1 st amendment protection of freedom of speech, and in 2010 the Supreme Court made a landmark ruling in Citizens United v. Federal Election Commission that the prov ision was unconstitutional.
67 There are two outside interest groups: PACs and Super PACs. The former are groups that raise money to donate to parties and candidates, and the latter are groups that raise money to spend on issue advertising independently of a ny party or candidate efforts. The misguided legislators who crafted the BCRA attempted to limit the spending of both types, but the predictable ruling in Citizens United meant that it only regulated PACs. This resulted in a proliferation of Super PAC spen ding, with money pushed even farther from candidates and the party committees that support them than FECA had. The Home Interest Deduction and Preferential Rates for Capital Gains The home interest deduction came to generate a formidable self sustaining political mechanism by this period. It has continued to maintain public support even as it feeds a burgeoning lobbying force that is able to target members of Congress or presidential hopefuls who challenge the deduction, at a time when these candidates a re increasingly reliant on special interests for funding, and increasingly vulnerable to special interest attacks. The rise in issue advertising means that certain interests who have a direct stake in a deduction can target any politician who opposes it to devastating effect, and in this case the lobbying power of the National Association of Realtors can be brought to bear to punish any politician who challenges the home interest deduction. Preferential rates for capital gains, after a brief elimination in the base broadening tax reform of 1986, have been reinstated and maintained by tax writing committee actors as a way to maintain the support of business interests and the wealthy.
68 5.3 Political Developments and the Diffusion of Tax Writing Authority The above changes in the incentives structures of politicians gave them the motive to make rules changes which had the effect of diffusing authority within the House after the overthrow of Chairman Mills. In addition, the diminished clout of the HCWM meant that the reputation Mills had built for the committee which caused it to have more success in conference was lost, and the Senate reasserted coequal status. The End of the Southern Democratic Cycle in the HCWM By 1970, discontent had grown among liberal Democrats over the tight control that conservatives had over the leadership positions as a result of seniority, and they formed the Democratic Study Group, an informal organization pushed for the opening up of House procedures. Liberals were especially in dignant at the HCWM and Mills, who shut liberals out of the creative process behind major tax legislation, using his conservative coalition of Republicans and Democrats to draft bills, after which they Committee to send them through Congress under closed rules to prevent amendment (Kennon and Rogers 1989, 351) The Watergate scandal swept unusual numbers of incumbents out of office, and the result was that Democrats era were replaced with more liberal members. This, combined with the urgency of reform in the political climate, allowed this more liberal Democratic caucus to initiate congressional reforms that th rew conservative Democrats out of leadership positions. The committee was stripped of its longstanding authority to control Democratic committee
69 Committee, and the s ize of the committee was increased to 37 members to allow more junior, liberal members to be appointed (Kennon and Rogers 1989, 354) In addition, House Resolution 988 initiated several rules changes that scattered more authority, undermined the ability of chairs to centralize committee power by requiring the division of large committees into subcommittees and dedicating a minimum portion of the staff (which was dramatically expanded to enhance capacity) to the se and to the minority. These changes were aimed at increasing the say of rank and file members, and it was in this spirit that the Congressional Budget Office was created to provide expert and objective tax advice to not only the average representative, but to the average citizen as well. Another rule allowed the caucus to demand an open rule to ensure that the Rules Committee could not prevent a majority of the caucus from offering amendments (355) The B eginning of the Modern Cycle in the HCWM The dramatic series of reforms not only reduced the ability of the HCWM to concentrate authority both by lowering its stature in the House and by weakening the ability of the chair to effectively lead the committee In this way, they diffused authority within the House, away from centralization in committee chairs and toward individual committee members and rank and file members. The significance of standing committees relative to the power of the party caucus was r writing authority in its tax writing committee became much more difficult as rank and file members and the a ccrue authority. The reforms not only made it more difficult for the HCWM to control the House; they made it more difficult for the HCWM chair to control his or her own
70 committee. The mandate that subcommittees be established (Mills had chosen not to estab lish them at all) and that they have access to committee staff (previously chairs controlled all staff and could choose whether or not to devote some of it to subcommittees) allowed these subcommittees to develop their own areas of expertise, devolving som the floor debate on legislation under their purview. This division of tax writing authority and the rules that encouraged open meetings multiplied the access points that special interests had to the creative process behind tax legislation (369) Despite the obstacles that reformers threw in the way of efforts to concentrate authority, chairs have still managed to do so with in the context o f modern rules by reasserting some control over the diffused administrative capacity of Congress. Chairman Rostenkowski, the last Democratic chair before the Republican takeover in 1994, was able to suppress the autonomy of subcommittee chairs by reasserti ng control over the hiring of staff and by requiring subcommittees to provide reports on their legislation to the whole committee for consideration. He also increased the number of closed meetings, allowing a more frank bargaining process and reducing the influence of special interests (369) 6. The Reagan Reforms in the Modern Context The reforms undertaken by the government in 1986 were the most significant changes to the tax code since the 1940s, bringing the tax code closer to a tax theoretical ideal than it had been in decades, a temporary victory for both liberals and conservatives This study has demonstrated that lasting changes in tax outcomes are caused by political
71 development in tax making institutions. The short lived nature of this victory can be put into context when one observes that the 1980s were remarkable not for polit ical development of tax institutions, but for a relative lack thereof. 6 .1 Strengthening of the Ne w Deal Regime in Reagan Reforms By the time Ronald Reagan rode a growing tide of anti government sentiment into the White House, the New Deal regime was on the verge of collapse. With tax expenditures undermining the broad base of the income tax and the reduced capacity of corporate taxa tion due to inflation (Brownlee 2004, 130) two of the three pillars upon which the regime was founded (broad based progressive income tax and flat corporate taxation) were crumbling. In addition, the popularity of inco me taxation was dramatically reduced as income taxes which were not indexed to inflati on 4 in the context of income (dollar value) would push them into a higher tax bracket even if their real income remained constant or declined, which effectively caused unlegislated tax increases (Brownlee 2004, 132) By 1985, the deep tax cuts enacted in The Economic Recovery Tax Act of 1981 led to poli tically damaging deficits that were also economically worrisome. Reagan may have been elected to reduce the size of government, but the only effect of the first few years of his administration had been to cut revenue even as the government continued to 4 Given an individual making $40,000 per year and a $50,000 cutoff for the next marginal rate in a given year, 20% inflation and constant real income for that year would mean that the cutoff for the following year would be raised to $60,000 in an income tax indexed to inflation, sparing that person (whose real income had not increased) from the tax increase that she would have incurred in the 1970s code as her nominal income increased to $50,000.
72 spe nd as it had since the establishment of the New Deal regime, actually ramping up defense spending t o make the situation even less sustainable. It was in this context that the Treasury suppressed the influence of extreme supply side economists and promoted base broadening reforms along the lines of the Haig Simons definition of income convincing the President that such a reform would be efficient and fair even as it reigned in deficits HCWM Chairman Rostenkowski used his influence to win support from Democ rats in the House, and Reagan used his considerable influence to persuade enough 1986 passed. 6 .2 Durability of Theoretically Pure Taxes in the Modern Era The Short Lived Efficiency and Fairness of the 1986 Reforms The 1986 reform represented the most significant step since the inception of the income tax to eliminate tax based privilege and limit the extent to which the income tax inefficiently skewed incentives It reduc ed individual rates across the board, lowered the top marginal rate from 50% to 28%, reduced the top corporate rate from 48% to 34%, took 6 million poor Americans off the tax rolls through increased exemptions, expanded ome tax to poor A mericans, (welfare payments to supplement the income of the working poor, administered through the tax code) increased capital gains rates from 20% to 28% to eliminate the preferential rate on capital gains, and slashed a variety of other tax expenditures, particularly those applying to business or investment (Brownlee 2004, 174) Analysts have estimated that despite the fact that most of the value of the tax cuts went to the rich, the other elements of reform were so
73 progressive that they actually offset the regressive effects of the Economic Recovery Tax progressiveness in the code unchanged (176) In theory, this episode represented the ideal tax reform. It maintained the preexisting vertical equity within the system while greatly increasing horizontal equity and reducing administrative costs and resulting inefficiencies. V ery few of the positive effects of the reform remai n today, with the main lasting effects being the overall lower tax rates the expanded benefits to the poor through the EITC and a host of other small provisions. The surviving provisions marked significa nt progress, but overall the code became just as complex by the end of the 1990s as it had been in 1985. The rare political circumstances and massive amount of political capital expended were, in the long run, wasted on a brief curbing of the inexorable tr end of the tax code toward complexity. The fact that loopholes have been reintroduced to the system is again undermining the ability of the New Deal regime to meet revenue needs of modern government. Institutional O rigins of the Failure of 1986 Reforms After the Watergate juncture, institutional relationships were such that politicians were more reliant on interest group money as money was pushed away from candidates and parties, and were simultaneously more vulnera ble to the attacks of the PACs and Super PACs which had grown as they became the only legal destination for money that could not be directly donated These susceptible politicians occupied tax making institutions that had scattered authority as the result of ongoing ideological and partisan conflict within the context of the origination clause, formal separation of powers, and a bicameral legislature giving interests multiple access points which they could use to
74 affect tax legislation and creating a situ ation in which no single entity controls tax outcomes, making it impossible to assign blame for failures involving the budget These institutional relationships existed within the context of the wider New Deal tax regime, which was characterized by high re venues as a percent of GDP, increasing incentives for interest groups to carve out privileged positions. By 1987, politicians were in the virtually the same position as they had been in 1985 In fact, t he only significant development since then h as been in campaign finance law, with modifications in 2002 merely accelerating ongoing trends toward enhanced interest group influence In this context, the incentives of politicians before and after reform were to work within the New Deal regime to enact expendi tures to win the support of interest groups and to avoid touching deductions that have s trong backing. Even if this did not create an efficient or f air tax code, and even if it did not keep deficits in check, politicians minimize risk in this way because a uthority is scattered to the extent that no individual member can be blamed for budget failures. The executive ha d no lasting authority over tax creation (only able to assert creative authority in times of crisis) and thus no final responsibility, the HCWM c ould blame the SCF and vice versa, the HCWM c ould blame the party caucus in the House for unacceptably amending bills as a result of the difficulty of using closed rules; the list goes on. The two aspects of reform that have proved durable much lower marginal rates and expanded EITC, have lasted because institutionally structured incentives do not affect them. The incentive for politicians to raise taxes only arises in times of crisis, and there are limits even at those moments. The EITC is an accepta ble feature of the New
75 Deal tax regime along with every other deduction, and has effectively increased the vertical equity of the code.
76 Chapter 4 : 21 st Century Tax Reform and Political Development Given the insight that the institutionally constrained expression by members of Congress of the political motive to be reelected is what drives the development of tax institutions and creates the tax code at any given point in time, this chapter defend s the claim that lasting tax reform should refo rm institutions and their incentives structures rather than the code itself. This insight should lead us to conclude that even if every recommendation of the Simpson adopted, few aspects of the reform would be successful in the long run, and the end result would only be to lower the efficiency and equity of the code. R eform programs based on an i nstitutional perspective c ould be successful in the long run because they are aligned with political motives of members of Congr ess.
77 1. Prospects for Contemporary Tax Reform Due to the fact that institutional incentives have only increased the value of distributive benefits to representatives since the 1980s, all indications are that the expression of the political motive would, i n the aggregate, continue to complicate the tax code with inefficient and inequitable modifications. Undertaking a major reform along the lines of that in 1986 may actually be very damaging, because the current institutional relationships mean that special interests will have more clout than ever in the free for all that erupts as the new code is formed. If the institutions are not changed, embarking on a program of radical reform could be risky because tax overhauls are lia ble to devolve into bargaining s essions in which special interests actively participate in (Gruber 2011) If every aspect of the Simpson likely that the continued expression by members of Congress of their pol itical motive would mean that only the reduction in marginal tax rates would withstand succeeding tax legislation in the long run. The proposal to remove all tax expenditures (save for the EITC, the child credit, and a few others) would surely make the cod e more efficient and equitable, but in the long run members of Congress would have the incentive and abilit y to reinstate expenditures again in return for interest group support. There is no indication, in other words, that in centives have changed such tha t any modern simplification would have any more lasting results than the one which occurred in 1986.
78 2. The Institutional Perspective and Durable Reform The institutional perspective would push a potential reformer to one (or both) of two approaches to lasting reform Knowing the dynamics of institutional relationships and develo pment, one can predict what types of legislation might remain unaffected by the continuous expression of the political motive. In this way, reformers could craft tax reform t o make it durable even in the context of existing incentives. Given that institutions determine eventual outcomes, the only other path to durable reform is to pass a law that directly targets one of the institutions, not necessarily the tax code itself. Pa rtially reforming the tax code, regardless of the good intent or solid economic thinking behind it, will have the same result as it did in 1986: failure in the long run. 2.1 Durable Reform within the Institutional Framework An understanding of the way cu rrent institutional dynamics structure the expression of political self interest can allow reformers to craft legislation that changes the tax code in a durable way even without making any changes that affect the institutions themselves. Generally, within the current institutional environment, reductions in margin al tax rates will prove durable (though this may become more difficult if the country approaches a debt crisis) tax expenditures will be durable, and raising payroll tax rates may prove durable as well. Evidence from history suggests that lower marginal rates are not incompatible with the current regime or institutional incentives structures. Significant increases in rates are politically acceptable in very limited cases, usua lly during major wars. Since World
79 War II rates have been cut significantly, but raised very few times, generally with fairly significant political consequences for those involved with the rate hike. Further evidence can be found in our counterfactual case: one of the few last ing effects of the 1986 reform was to significantly lower rates. Tax expenditures will continue to proliferate as members continue to express their political motive by offering deductions, exclusions, and preferential rates to electorally significant actors. While expenditures are generally inefficient and inequitable, they can be used to effect desirable changes in the tax code. A program like the Earned Income Tax Credit, for example, represented significant reform in terms of vertical equity in the tax code, and has been the most durable and significant source of welf are since its creation. It is one example of good tax l aw that has survived because the institutional incentive structures in place make it politically sensible for the majority of representatives to avoid serious attempts to repeal or significantly reduce it. 2.2 Durable Reform through Induced Political Development The second avenue that an institutional perspective suggests is for reformers to implement a change that alters the relationships between relevant institutions. There is no historical example we can call upon of an intentional implementation of a lasting tax change through institutional reform, but certain periods in history suggest it might be possible. Historical developments are all caused by the actions of individuals, but it is very diffi cult for institutional actors to predict the effects that any given action might have on development. Using evidence from history, however, one might be able to
80 predict the impacts of ce rtain actions with some success. Most institutional reforms for intentional purposes would have to take place in the politically flexible context of a crisis, though even modest modifications can have significant developmental reverberations. The Political Motive and Distributive Benefits Th is study has demonstrated that much inefficiency in the tax code is due to the fact that representatives have the political motive to use it to dole out distributive benefits to ensure reelection, thus any change that reduces the significance of this motiv e will increase the efficiency of the tax code in the long run by making reforms like the one in 1986 less liable to be undone by the continued expression of political self interest. In institutional reform that takes political motives into account, we cou ld modify how the expression of political motives affects the tax code by either changing the incentives that fuel the drive to use di stributive benefits, or rearrange institutional relationships to change how the existing expression of political motives i s channeled. Institutional Reform as the Basis for Durable Change The only reason vested interests lobby to influence government action is because they know that it is financially sm art for them to do so. They spend money because past experience indicat es that for every dollar they put in, they are likely to get more than a dollar of returns To understand the potential impact of reform that attempts to restructure the institutional framework that channels the expression of the political motive, take th e hypothetical situation that Congress passed a law mandating publicly financed campaigns,
81 with the government allocating a certain amount to each qualified candidate. This law would, of course, be unconstitutional, but it is a useful example that illustra te s the form that institutionally targeted reform would take. Such a change would dramatically lower the political motive of members of Congress to give out distributive benefits. Given that they would no longer be reliant on the financial backing of speci al interests, distributive benefits would no longer be utilized to secure their support. Tax expenditures that afford privileges to certain industries would certainly become less prevalent over time, and the code would durably become more simple, equitable and efficient. Members would still be politically motivated to provide distributive benefits to influential individuals and to their constituents and thus significant deviation of the code from tax ideals would still occur, but the improvement would be t angible and lasting. 3. Speculations on Future Developments in the Tax Institutions Brownlee (2004) speculates in the last chapter of his book that the ability of the New Deal regime to support the appropriations commitments of our government may be undermined. He argues that the tax cuts of 2001 and 2003 were enacted by the Bush administration with the goal of undermining core pillars of the Ne w Deal regime with revenue restrictions that would induce a fundamental change in the nature of social welfare programs like Social Secur ity, Medicare, and Medicaid. Given the fact that tax expenditures are popular and difficult to remove, and that tax r ates are much easier to cut than to raise, the revenue base of the New Deal regime is
82 vulnerabl e to the actions of politically motivated members of Congress A continued optimal level may lead to a debt crisis, depending on how intractable the differences of parties are. This may provide a powerful politician with the mandate to undertake the layering of a new tax regime upon the current one. Brownlee notes that the evide nce of historical regime shifts indicates that any new regime would probably increase the revenue capacity of the government and contain progressive tax mechanisms (2004) 3.2 Campaign Finance Developments The recent nt expenditure only or Super PACs, has inspired a great deal of consternation in the public and among academics and legislators on all ends of the political spectrum. Levitt notes that the decision in Citizens United v. FEC was part of a larger trend in the development of campaign finance law and actually much less substantial than is commonly assumed (2010, 217) The decision was certainly what transformed a preexisting concern over the campaign finance laws. Corrado et al (2005) note that major shifts in campaign finance law occur red in the midst of popular discontent that pushed politicians to action ; thus there is reason to be wary of an impending change i n campaign finance legislation. It is historically the case that each new development has made politicians more reliant on spe cial interests for money, and thus it would probably not be misguided to hypothesize that a change would push money further from politicians. In the case that Super PACs were regulated within
83 the framework provided by Citizens United is it likely that the money that would have been donated to them would find its way into the political system in other ways and innovations in campaign financing occur 5 4. Limitations of the Study and Future Research This study serves to direct future research more than it definitively proves a causal factor. It has demonstrated the theoretical sense behind the idea that institutional changes that structure political motives of members of Congress are the underlying ca u se of changes in the tax code. In future research, I would use a more rigorously empirical analysis of a more limited time frame to provide more concrete evidence for a causal link between distributive benefits and the institutionally bounded incentives s tructures which drive development and affect the tax code. In addition to a more rigorous defense of this causal link, this study directs future research toward a more comprehensive articulation of what institutional tax reform would look like. This would involve the identification of how a given change in a specific institution would modify the incentives of politicians in relation to the tax code, and how we might expect these modified incentives to shape outcomes in the tax code. 5 5 For the basis of the concept that campaign spending is at an equilibrium level and will only be shifted, not lowered, by tax incentives, see Issacharoff and Karlan (1999)
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