A Dynamic Tax System

Tax systems can get out of date. For example, an income tax designed with a rate structure to apply to specified income levels (some type of progressivity goal), will become out of date if the tax brackets are not adjusted for inflation. That is, if individuals with income between $30,000 and $40,000 are to have a 15% rate, they will start to creep into the next higher rate as their income increases with inflation (for example, a person gets a cost-of-living raise), even though their buying power has remained constant (they are really no richer). So, one way to keep the system current, is make an inflation adjustion to the income levels at which each tax rate bracket begins.

What about keeping a tax base current and relevant? That is, enabling a tax base to reflect current ways of doing business and how people live even as things change. That's harder than the rate adjustment which can just be built into the law by having a rule that tells the IRS to adjust the rate structure annually for inflation. Keeping a tax base current and relevant requires regular attention from legislators and making tough decisions. For example, perhaps decades ago it made sense to provide special tax breaks to a particular industry. Yet, if such breaks are not looked at regularly, they remain even when no longer needed. And, it is politically difficult to get a tax break removed once it has been there for a while.

One remedy to the need to regularly update the tax base is to have a broad tax base (with few special rules) and a lower rate. This should reduce the need for special rules. Another solution is to have a termination date on all special rules. What about drafting rules that can self-adjust?
Keeping a tax base relevant is challenged due to changes in technology, society and the ways of doing business. A significant example today is the sales tax base in many states. Most sales tax systems include tangible personal property and a few services in the base. Today, some things that traditionally were consumed in tangible form can be consumed in digital form, such as books, movies and music. These changes (assuming these digital items can't be called "tangible" under the state's law), cause the tax base to decline even though consumption levels are the same. The solution is to modify definitions of what goes into the tax base. Not doing so, can lead to drops in tax collections.

In California, the California Budget Project did the work to measure the drop in revenue that can result when a base has not kept up with changes in consumption and the meaning of "goods." The CBP estimates that if the same percentage of personal income were subject to sales tax today as was subject to the tax in 1966-1967, California would collect almost $16 billion more in sales tax today (source, pg 33) Of course, prices and income need to be considered as well, but clearly, the base has diminished to some degree just due to the change in the form of products people can consume today.

Given continued changes in technology, consideration should be given to use of language that will not be outdated in a few years (although not always an easy thing to do). One interesting example of trying to keep a tax base from getting outdated by technology (and being clear in describing what you're trying to tax) was a change Florida made a few years to ensure that "communications services" would be taxed despite the possibility that new ways to make a phone call would continue to arise. Here is their definition (emphasis added):

"Communications services” means the transmission, conveyance, or routing of
voice, data, audio, video, or any other information or signals, including cable
services, to a point, or between or among points, by or through any electronic,
radio, satellite, cable, optical, microwave, or other medium or method now in
existence or hereafter devised, regardless of the protocol used for such
transmission or conveyance."

Back in the 1930s when many states enacted sales tax laws, if they had considered the possibility that goods might someday be acquired in intangible or digital form, they would have most likely written their tax rules differently. To be clear that they wanted to tax certain types of consumption, they would have said the sales tax applied to "goods or products no matter how obtained, provided they are used for personal consumption/enjoyment."

As Congress and state legislatures continue to consider tax reforms, they should also think ahead and carefully chose the language for defining the tax base to enable the law to self-adjust as business practices and ways of living change. Where feasible to do this, it will possibly lead to a more certain tax law (the intent is more clear), eliminate delays in updating tax bases and keep tax revenues where expected.