Carly Fiorina wants a three-page tax code?

Photographer: Justin Sullivan/Getty Images

Some Dumb Questions and Some Smart Answers

Megan McArdle is a Bloomberg View columnist. She wrote for the Daily Beast, Newsweek, the Atlantic and the Economist and founded the blog Asymmetrical Information. She is the author of "“The Up Side of Down: Why Failing Well Is the Key to Success.”
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Toward the end of last night's presidential debate, one of the moderators asked Jeb Bush a question about fantasy sports betting: Is this gambling, and should it be allowed? This was, as Chris Christie pointed out, a fairly stupid question. On a comprehensive list of important questions that our next president will need to deal with, the regulation of fantasy leagues ranks somewhere between the emerald ash borer and the design of the next set of White House china.

In fairness, the Republican candidates had spent so much time in fantasyland earlier in the debate that the moderator may have thought this was on point. This was supposed to be the economics debate, although the moderators seemed to quickly get bored with all that finance and economics stuff, switching to poorly researched gotcha questions on topics of limited economic significance, like Marco Rubio’s personal finances and Ben Carson’s views on gay marriage. Nonetheless, aside from the oppo research dumps, we did get discussion of two topics that matter to the economy quite a lot: taxes and entitlements.

On entitlements the Republicans conducted a serious debate, with Huckabee arguing that we’ve made promises we have to keep, and other candidates explaining, surprisingly deftly, why we need to reform the programs for future generations in order to keep our promises within our pocketbook. On taxes, however, they stopped debating each other and started debating reality.

Bush reiterated his plans to deliver 4 percent annual growth through the magic of tax reform. Carson claimed that a flat tax on the order of 15 percent would be possible without blowing the budget deficit up past the trillion-dollar mark. Carly Fiorina said that the tax code should be three pages long, because anything longer than that put small businesses at a disadvantage compared to big corporations that can afford a lot of fancy tax lawyers.

Now, look, I’m probably more favorably disposed to Republican tax priorities than most of my fellow journalists. I think the government should be smaller, that it should do less, and therefore cost less. I am a weak supply sider: I do not think that tax cuts pay for themselves, but I think that taxes do suppress economic growth somewhat, and that this is one of the reasons that lower taxes are better. I have been pounding the drum about tax simplification since my very earliest days as a larval pundit. But as a rule, I endorse the old Daniel Davies maxim: “Good ideas do not need lots of lies told about them in order to gain public acceptance.”

Republicans and Democrats suffer from a common delusion that there is some magic lever we can use to make the economy grow, if only we elect a president with the vision and iron determination to grab that sucker and pull really hard. This illness presents differently, depending on the patient. Democrats think the government needs to get right in there and micromanage our way back to 1950, preferably Sweden in 1950, while Republicans think that the road to prosperity is paved with low marginal tax rates. But no matter what the symptoms, it is still a sickness. Economic growth is mostly a matter of millions of individuals making decisions to save, invest and consume in new and better patterns -- and as amazing as this may sound, most of these people are thinking about things other than the government when they make those decisions.

Do taxes and regulation affect those decisions? Of course they do. But the effects happen on the margins, at least in modern industrial democracies where the government has largely refrained from collectivizing the farms or nationalizing the coal mines. Most of what happens in a basically free economy is going to happen whether or not the government lowers the corporate tax rate, or offers businesses a new and improved version of the R&D tax credit.

This means that adding an extra tenth of a percent onto the growth rate through policy is really hard. Nearly doubling the growth rate -- which is what Bush is proposing to do -- is basically impossible unless the baseline government policy is really bad. Of course there are many, many government policies that could be better (indeed, practically all of them). But we are not wheezing under Venezuelan-style corruption and mismanagement. Growth is tepid because our workforce is aging and productivity growth is sort of slow, not because millions of would-be entrepreneurs are cowering under their beds in fear of the tax man. Whatever supply-side benefits tax cuts will unleash will not be enough to let you run a government of the size that Americans demand on tax rates of the size that Carson is promising.

And Americans do demand that size government. How I wish it were not so, but there you are. They want their Social Security and their Medicare, their giant military and their equally giant national parks.

What they don’t want to do is pay for them. That’s the political insight behind lines like Fiorina’s claim that she could shrink the tax code to a dainty, bite-size three pages, which sounds splendid until you think about it for more than a few brief seconds, at which point you realize it’s utterly daft. The tax code could certainly be shorter than it is, and ought to be. But as long as we’re going to tax income -- and trust me, we are, because the alternative is to stop writing those Social Security checks right now -- then we need to define what income is.

If you’re a wage earner, that sounds simple; income is the check you get every two weeks. But what if your company buys you dinner or gives you a company car? Unless you have rules about that sort of thing, you’ll have an income tax that collects no money, because everyone’s working for free while the company buys them meals, homes and all-expense-paid trips to Maui.

Business income is even more complicated. Tax them on revenue rather than income, and you risk sending low-margin businesses into the bankruptcy courts during lean years. But if you want to tax them on income -- revenue minus expenses -- then you need to decide what counts as an expense, and what counts as managers looting the company coffers to send themselves on all-expense-paid trips to Maui.

These sorts of questions are not going to be decided in three pages, not even if you set the font to two points and give every taxpaying individual and business owner a government-subsidized magnifying glass. Nor will shrinking the tax return to a postcard allow us to get rid of the IRS, as Ted Cruz bizarrely claimed. (Where do we mail the postcards? Publishers Clearing House?) Fiorina, having run a business, and Cruz, having spent a little time in Washington, presumably understand that what they’re saying makes no sense.

As policy, anyway. But politically, they are speaking to a great truth: Americans hate paying their taxes. They hate seeing the money disappearing from their paycheck, and they hate wrestling with the complex and inhumane monster that is the U.S. tax code. They like it when politicians promise to make these unpleasant experiences go away, or at least make them so tiny that we’ll barely notice.

Unfortunately, you can’t do that without cutting stuff that people like and will definitely notice missing. Sixty percent of the federal budget is spent on just four categories: Social Security, Medicare, national defense and interest on the national debt. That’s what we’re spending now, not what we’ll be spending in 10 or 15 years when our entitlement finances really get out of whack. Many more dollars are spent on things like courts, customs and border patrol, national parks, veteran’s benefits, and unemployment insurance, things that Republicans have no intention of doing away with. As long as we have those things, we are also going to have to send money to the IRS to fund them.

If Republicans want to talk about cutting taxes, they are also going to need to talk about cutting spending, because to spend is to tax. Every dollar that you spend now must either be paid for by taxes or borrowing, and every borrowed dollar has to be repaid with a tax dollar at some point.

On the stage tonight, Republicans complained that the Democrats were running as the party of free stuff without paying for it. They’re right; Democrats are selling the fantasy of a European-style welfare state paid for entirely by taxing a handful of rich people, which is not possible. But Republicans are selling an equally impossible fantasy: of an American-style welfare state paid for by no one at all. That’s the sort of gambling that no country can afford to allow.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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Megan McArdle at mmcardle3@bloomberg.net

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Philip Gray at philipgray@bloomberg.net