Tuesday, January 13, 2009

The Tax Canon -- Surrey '70

Today, finally, I'll say a little bit about Stanley S. Surrey, Tax Incentives as a Device for Implementing Government Policy: A Comparison with Direct Government Expenditures, 83 Harv. L. Rev. 705 (1970). Clocking in at only 35 pages of very straightforward text, I should have been done much sooner -- I suppose I can reasonably blame the beginning of the new semester for my delay.

It was my intention to find a pretty picture to accompany this post similar to that seen below in part 1 of my Bittker '67 post. Unfortunately, Stanley Surrey does not seem to be as prolific as the authors of the previous two articles; the best I was able to come up with is a list of a few of his books and articles, a rant deriding his policies on the taxation of overseas income, recognition that there is currently a Stanley S. Surrey Professor of Law at Harvard, and recognition in a Washington State Institute of Public Policy article that "The idea of identifying and measuring tax exemptions is often attributed to Stanley Surrey". The best source of Stanley Surrey biographical information came from a footnote on the first page of the article itself: "The paper itself says: Professor of Law, Harvard Law School. B.S., College of the City of New York, 1929; LL.B., Columbia, 1932. Professor Surrey was Assistant Secretary of the Treasury for Tax Policy from 1961 until 1969." Sounds impressive, and I'm surprised not to have easily found more information -- or at least a photo.

The paper can be pretty well summed up by its own summary (duh):"The tax code contains a great number of special provisions which provide credits, deductions, and other tax advantages intended to achieve non-tax goals considered desirable by Congress... Professor Surrey argues that the tax incentive is generally inferior to the direct subsidy as a means of achieving social goals: that incentives are usually less equitable, since they benefit persons in high tax brackets most, and more difficult to develop and administer, since they are handled by tax committees and administrative agencies which have little expertise in non-tax social policy. He suggests a strong presumption against their use."

Much like Bittker '67, this article spends most of its time tearing down previous statements of others. Surrey presents a number of reasons generally given in favor of using the tax code as a tool of social policy (most of which seem facially pretty weak anyway) and then explains why they are flawed at best and idiotic/corrupt at worst. In most cases, the use of the income tax to bring about policy goals is counterproductive because of the progressive nature of the tax code (deductions are worth more to the rich than the poor), distortionary effects on economic activity, and because lost revenues are often in excess of the value of the change that is sought. Surrey concedes that there may be a way to design a tax incentive such that its negative effects would not be greater than those of a direct transfer program, but in such a case we would be relying on tax experts to administer social policy. It would be much better to allow the tax folks to run the tax system and the social policy folks to administer social programs.

For once I didn't feel particulary dumb while reading this article, but I did realize that I have never fully considered the purpose of income phaseouts of some tax benefits. I guess I had assumed that income phaseouts for such programs were just a means of minimizing revenue loss when in fact they are also probably in place to avoid giving the rich a larger benefit than the poor and thus directing the bulk of the program's resources on those who don't need the program to begin with.

Ok, one more down and quite a few more to go. Next time let's read J. A. Mirrlees, An Exploration in the Theory of Optimum Income Taxation, 38 Rev. Econ. Stud. 175 (1971).

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