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SEIFFE:  Weak Market Signals Doom Tax Reform

Wednesday, March 22, 2006

By Ralf Seiffe

Eleanor Holmes Norton, the fake representative for Washington D.C., appeared on Brit Hume’s Special Report last Friday night giving perhaps the most revealing interview I’ve ever seen.  The subject was the latent proposal that an experimental “Flat Tax” be offered in Washington D.C.  Featuring a novel, “dual boot” system in which taxpayers could choose either the flat tax or stay with the current rules, Washington residents would be first in the nation to use a modern tax system.  Despite the obvious empirical value of conducting such an experiment, Delegate Norton’s attitude in this very short interview shows reformers why, without a change in strategy, tax reform is a dead letter.  

Ms. Norton was concerned that the flat tax option would draw new residents into the District of Columbia . Ms. Norton sees gentrification as the danger, a process she described as “already out of control.”  Translated from politispeak, I take her meaning as “low taxes will attract productive, urban pioneers into my district. They will out-bid my constituency for real estate and replace festering, welfare check cashing liquor stores with Borders and Starbucks.  Eventually they will vote me out, preferring someone who will protect their new investments in Northeast or Southeast D.C. ”  

Delegate Norton, who once supported a non-sequitur called the "progressive flat tax", is obviously not a fan of a real Flat Tax or any other plan that would draw private capital into the District of Columbia.  Her perfectly selfish attitude illustrates the problem for tax reformers; Ms. Norton has no reason to listen to them.  The correspondents for Special Report understand this and reported that tax reform isn’t something they believe we will see anytime soon.  

Rational advocates of tax reform are frustrated that we cannot have a small experiment or an honest debate about improving our tax system.  It’s even harder to understand why the delegate for Washington D.C. would be willing to put her personal interests in front of the rehabilitation of Washington D.C. when for her entire career, she’s positioned herself as the best hope for D.C.’s residents.  

This apparently unfathomable situation becomes easier to understand when one repositions it into a business context.  For just a moment, think of Ms. Norton as the local franchisee of Government, Inc.  In this incarnation, she enjoys an exclusive territory and semi-exclusive access to Government, Inc.’s most important product, spending.  Government, Inc. provides all manner of benefits, too; these range from excellent office space, fawning newspaper reporters and even a pension and benefit schedule that’s otherwise unavailable. Ms. Norton and her friends recognize this as a deal worth preserving so they have taken extraordinary steps to ensure they keep their perches.  They have been successful in that effort, limiting eligibility to one of two political parties and thereby achieving a retention rate that exceeds even the Russian or Chinese version of Government Inc. 

The domestic version of Government, Inc. has eliminated competition from all other entities that might want to enter the governance market.  In addition, it’s developed a pricing policy that’s ostensibly designed to provide discounts for insiders and favored customers but it’s really mostly arranged to preserve the organization’s prerogatives.  For most customers, however, the price rules are nearly impossible to understand, discriminatory and enabling to criminals.  Faced with that description, one would think Government, Inc. would be racing to change. 

It’s not because organizations act only when it is in their interest and Government, Inc. is no different.  Market-oriented entities rely on market signals to help determine when it is in their interest to act.  Well-managed businesses take pains to understand their markets and when signals strong enough to overcome internal bureaucratic inertia accumulate, policies change. 

Managers at Government, Inc. are at a disadvantage, however.  By monopolizing its “market” and coercing the customers, it foregoes the market signals so useful to private operations.  Indeed, they have arranged their bureaucracies to stifle signals and innovation.  

In one sense, avoiding the work associated with understanding those market signals makes working for Government, Inc so attractive.  Falling revenues, defecting customers and layoffs are simply not part of the experience.  Perhaps Ms. Norton is so hostile to a Flat Tax experiment in D.C. because installing it will create overt market signals that even the gang at Government, Inc will have acknowledge, understand and confront.  

The lack of undeniable market signals spotlights the real hurdle for tax reformers.  Their current strategy does not generate signals that are strong enough to reach Ms. Norton and her friends in their lofty offices at Government, Inc.  In fact, the solid economic research the Fair Tax folks have arrayed wasn’t enough to capture even the attention of the president’s tax reform commission.  That the commissioners only recommended tinkering with the status quo is especially disheartening given the fact that the commission’s organizing principle was that the tax system is “broken.” 

Because Government, Inc has insulated itself from the market data that compels other organizations to change, it will resist all reform, no matter how compelling.  This will not change until the signals recommending change strengthen sufficiently to command Ms. Norton and her colleagues’ attention.  For reformers, this means moving beyond the current academic approach to grass roots organizing to one that enlists those folks to generate stronger signals.  What’s needed is a signal to Government, Inc. that is as strong as declining market share is to private sector organizations.  The task for reformers is to figure out what that signal is.  Without it, Ms. Norton keeps her job--and her attitude--with Government, Inc.

© 2006 Ralf Seiffe

Ralf Seiffe advises business start-ups and product launches from Chicago, Illinois and is a political analyst and columnist for the Illinois Leader and Illinois Review.