A simple bare necessity

The Benefit and the Burden: Tax Reform—Why We Need It and What It Will Take. By Bruce Bartlett. Simon & Schuster; 271 pages; $26. Buy from Amazon.com

FEW subjects match tax reform for economic importance and utter lack of sex appeal. With a government bleeding red ink, an ageing population and growth lagging, reform is back on America's political agenda. Bruce Bartlett, a supply-side economist, tax expert and former adviser to President Reagan, is among those best equipped to help navigate the murky terrain. Mr Bartlett held influential economic positions during the country's last great spasm of reform in the 1980s, but he is now held an apostate by many Republicans, for whom the only acceptable tax changes are cuts. His balanced, well-researched primer on America's tax system, “The Benefit and the Burden”, will not endear him further to ideologues, but it is a refreshing entrée to a difficult subject.

The book's no-nonsense approach to tax policy proves surprisingly engaging. Mr Bartlett walks readers through discussions on income and spending—basic concepts made baffling within the context of the tax code. He offers a dose of history and the useful perspective of a seasoned Washington hand. America's labyrinthine tax rules are hardly the product of intelligent design, he explains. The popular deduction for home-mortgage interest that helped create suburban America, for example, was not adopted to boost home-ownership but included quite innocently in a 1913 income-tax law that spared interest of any kind. Where economics has useful things to say about tax Mr Bartlett is quick to cite research. And he is prepared to let empirical analysis speak for itself.

Mr Bartlett's critique of America's tax system is that it creates a deceptive picture of the influence of government, and is far too costly. On revenues as a share of GDP, America's government looks small relative to its European peers. The difference is illusory. European health spending shows up on the government's ledgers whereas America's tax preferences for health insurance do not. But the government intervention is there all the same. In 2012 the deduction for employer-provided insurance cost some $434 billion, or roughly 3% of GDP. Include these “tax expenditures” in the budget, Mr Bartlett says, and America's state looks as bloated as any in Europe. Net social spending rises to 27.2% of GDP—above the level in Italy and Denmark and higher than the OECD average.

It is also needlessly costly, riddled with quirks of the sort that allow Warren Buffett, an American billionaire, and the Republican presidential contender, Mitt Romney, to pay a lower average tax rate than many poorer households. Rates should be cut, Mr Bartlett argues, but one must also broaden the tax base, leaving few loopholes through which revenue might escape. The value-added tax (VAT) that is common in Europe is a better way. VAT is a tax on consumption; firms receive credits for tax paid on business supplies. The structure improves compliance and efficiency. Europe raises more money than America at less cost to growth; some high-tax countries like Denmark outperform America in real growth per head.

Mr Bartlett favours the introduction of VAT, but reckons that politics will make this hard to do. It is doubly abhorrent to Republicans, who oppose any new taxes, and who fear that the “painless” efficiency of VAT may make the American government too eager to spend. Democrats, on the other hand, worry that VAT will harm low-income households relative to income tax, which is more progressive. European welfare states often rely on tax systems that are flatter than America's, using welfare spending to smooth out inequities.

America's politics seem ill-prepared for such reforms. Democrats, riding populist outrage at the rich, want to protect the welfare state and pay for it through tax rises on the wealthy. On the right, well-heeled Americans fume that nearly half of all households pay no federal income tax. Mr Bartlett's political diagnosis is perhaps the book's least satisfying aspect. Little will be accomplished until congressional Republicans are willing to compromise, he writes, and America's best chance may be to elect a reform-minded Republican president and a Democratic Congress—and to hope. In the end, the weaknesses in America's tax code are not half as debilitating as those in its politics.