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December 3, 2015
Tax History: Tax Uncertainty Is Certain, so Stop Complaining About It
Joseph J. Thorndike

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The tax extenders debate is all about certainty. The National Association of Manufacturers (NAM) said as much in a recent letter to Treasury:

    Making permanent the pro-growth tax provisions important to manufacturers would eliminate the cycle of uncertainty associated with temporary tax extenders, bringing confidence back into investment decisions that fuel economic growth.1

NAM's argument is neither unique nor unreasonable. But neither is it terribly relevant. A taxpayer's hope for certainty is like a farmer's wish for perfect weather: understandable but unlikely. Certainty is a good talking point, and it might be a decent aspirational goal, but it has nothing to do with reality.

There are two reasons why we should stop complaining about certainty. First, certainty is not in the nature of things -- not in life and not in the tax law. Second, certainty protects the status quo, which often does not deserve protection.

Inherently Uncertain

In an essay on the nature of law, U.S. Supreme Court Justice Oliver Wendell Holmes Jr. once observed that "certainty is illusion, and repose is not the nature of man."2 People naturally long for stability and permanence, Holmes wrote, but law is not the place to look for such comforts. He pointed out that many laws were actually the contingent expression of political struggle. "Such matters really are battle grounds where the means do not exist for the determinations that shall be good for all time, and where the decision can do no more than embody the preference of a given body in a given time and place," he wrote. "We do not realize how large a part of our law is open to reconsideration upon a slight change in the habit of the public mind."3

What's true for the law in general is especially true for tax law. Tax laws change. Sure, some elements of the revenue system have remained fairly static for years and even decades. But the tax law has always been a living institution, constantly evolving and always in flux. Sometimes change is the product of legislative tinkering (more on that later), but laws also change because the world changes around them.

Often change comes in the form of obsolescence. Laws are drafted in a particular context -- legal, economic, social, and political. Aware that these elements are prone to change, legislators try to build some flexibility into their statutory creations. But eventually, circumstance can render this flexibility inadequate.

That's how good taxes go bad; designed to function in one era, they struggle when a new one dawns. This was the case with the general property tax of the 19th century, which functioned reasonably well in a world dominated by tangible forms of wealth. Eventually, however, the general property tax was undone by the rise of intangible assets, which were harder to assess and easier to hide. The general property tax went from being a levy on wealth to being a levy on landowners (and farmers in particular).

The corporate income tax may be in the midst of a similar transition. Conceived in a 20th century world of limited capital mobility, it functions less effectively in a globalized world economy. The corporate tax is no longer doing what it once did. It's not the same tax it was a century (or even 50 years) ago in any meaningful sense.

Legislative Tinkering

Of course, many changes to the tax law are not evolutionary. Instead, they are engineered by tinkering lawmakers and the taxpayers who elect them. Democracies in general -- and American democracy in particular -- have a thing for tax legislation. Since 1960 Congress has enacted 66 major tax laws, according to a list compiled by the Urban-Brookings Tax Policy Center. At more than one major law per year, that constitutes a pretty good clip.

But it's still a conservative measure of tax activism. If we include the numerous laws that modify taxes in a more incidental fashion, we end up with a much bigger number; the Tax Analysts Federal Research Library identifies 387 pieces of tax-related legislation enacted since 1979.

There's not a lot of certainty implicit in that number. Indeed, for all the hand-wringing about uncertainty, taxpayers have been operating in a deeply uncertain tax environment for decades. As Alan J. Auerbach and James R. Hines Jr. observed in the wake of the 1986 tax reform, corporate taxpayers have grown accustomed to unpredictability:

    In the uncertain business of planning for U.S. corporate investment, one of the few reliable forecasts one can make is that the tax law will change before any new investment outlives its usefulness.4

The Tax Reform Act of 1986 made dramatic changes in the tax treatment of business investment, Auerbach and Hines noted. But these revisions came on the heels of other, also important changes passed in 1981, 1982, 1984, and 1985. Indeed, between 1953 and 1985, Congress had modified the tax treatment of business investment in 16 different years, they reported.

Given such a record, it seems likely that business had grown accustomed to uncertainty. That doesn't mean business taxpayers didn't long for stability. But it does suggest that uncertainty was not debilitating.

It's worth noting that legislative tinkering is often instigated by taxpayers. For instance, business entities have been seeking investment incentives for most of the last century. These provisions necessarily create both uncertainty and complexity. But neither problem is apparently serious enough to curb the enthusiasm for new preferences; every taxpayer will pay lip service to the virtues of tax stability, but few can resist the charms of a new tax break.

What taxpayers often want isn't certainty but the preservation of cherished tax preferences that threaten to disappear. That's certainly the case with the extenders debate.

Certainty Is Anti-Tax Reform

That brings us to the second point: Certainty is valuable only if you like the status quo. If you think, on the other hand, that the tax system is broken -- in ways both large and small -- you probably don't care much for certainty.

The status quo bias of certainty arguments can make for some notable inconsistencies. Not to pick on NAM again, but let's compare the group's position on tax extenders (to make most of them permanent) with its view of the tax system as a whole (to revamp it entirely). Here's a list of NAM's top tax priorities, conveniently located on the same page as its call for renewing extenders:

  • a lower corporate tax rate;
  • lower tax rates for small and medium-size manufacturers;
  • a strong, permanent, and competitive research and development incentive;
  • a modern international tax system; and
  • a strong capital cost-recovery system.

Some of these items involve the continuation of current policy, but others imply major and sweeping changes to the status quo. That mixture of change and continuity is reasonable, given the reality of how current law applies to NAM members. But at the end of the day, favorable tax treatment is the goal, not certainty.

More broadly speaking, certainty is the enemy of tax reform. This fact was evident during the run-up to TRA 1986, when business constantly fretted about the implications of sweeping change. "Some economic analysts fear that uncertainty over possible tax changes could cause a decline in business investment this year at a time when the sagging U.S. economy can least afford it," reported The Wall Street Journal in 1985. "The only thing worse than having reform in the tax code," said Peter M. Toja of Merrill Lynch Economics, "is talking about reform in the tax code."5

Calls for fundamental tax reform are clearly a source of uncertainty. But those calls usually come with their own sort of pro-certainty arguments. As one Los Angeles Times editor observed in 1986: "The tendency to change the tax system often is an issue in itself. Whatever happens this year, there ought to be a commitment, once a broad change is made, to leave the system alone for a while."6 (These sentiments bring to mind the famous prayer by Saint Augustine: "Lord, give me chastity and continence, but not yet.")

Historically, tax experts have urged lawmakers to resist the urge to tinker with the tax laws. While acknowledging that some reforms are necessary, they have warned against excessive enthusiasm for tax legislation. Commissioner of Internal Revenue Joseph J. Lewis made an impassioned plea in his annual report for 1863:

    For while taxation must always be a disturbing power among the laws [that] govern the distribution of wealth, affecting that distribution unequally, yet this evil is of small magnitude compared with that which results from great or frequent changes in the subjects and severity of taxation. A fickle policy in this department of government tends powerfully to unsettle every kind of business, making its profits irregular and uncertain, and so to encourage a ruinous passion for sudden and uncompensated gains, instead of the desire of legitimate accumulation by productive industry.

Transported to 2015, Lewis might have argued against letting the tax extenders expire. More likely, however, he would have argued against the creation of ostensibly temporary tax provisions in the first place.

Too Much Hand-Wringing

Worries about tax uncertainty are often legitimate; expiring provisions do make planning difficult. But ultimately, the severity of tax uncertainty is overstated. Lobbyists are the worst offenders, warning darkly about the uncertainty of business incentives. "Companies are putting capital budgets together right now and don't have a clear line of sight on what their tax bill will be on those investments," said AT&T Inc. CEO Randall Stephenson in remarks reported by The Wall Street Journal.7 "When the tax code is uncompetitive, like ours is, it has the effect of incentivizing investment elsewhere" in the world.

Stephenson should lighten up on all the melodrama. Given the long history of tax uncertainty -- not to mention economic uncertainty more generally -- it seems more than a little overwrought.

Economist Gerhard Colm emphasized the second point in a 1938 piece on New Deal tax reforms. "A corporation drafting a plan for expansion today faces a much greater uncertainty with regard to future profits than with regard to future profits taxes," he wrote.8

What was true in 1938 is just as true today: Life is uncertain, and the economy is just a part of life. Policy uncertainty compounds the problem, and all other things being equal, we should try to avoid wanton and unnecessary tinkering with the tax code.

But in the grand scheme of things, tax uncertainty is dwarfed by all the other sources of uncertainty. And in any case, taxpayers have managed to survive in an uncertain tax environment for decades. I'm sure they'll continue to muddle through.


1 Letter from NAM Vice President Dorothy Coleman to Assistant Secretary for Tax Policy Mark J. Mazur, Nov. 30, 2015, available at

2 Quoted in James Alm, "Uncertain Tax Policies, Individual Behavior, and Welfare," 78 Am. Econ. Rev. 237 (Mar. 1988), at 237.

3 Holmes, "The Path of the Law," 10 Harv. L. Rev. 457 (1897), available at

4 Auerbach and Hines, "Investment Tax Incentives and Frequent Tax Reforms," 78 Am. Econ. Rev. 211 (May 1988), at 211.

5 Alan Murray, "Cost of Uncertainty," The Wall Street Journal, June 19, 1985, at 1.

6 John F. Lawrence, "Uncertainty Is the Worst Part of Tax Debate," Los Angeles Times, Jan. 5, 1986, at C1.

7 Eric Morath, "CEOs' Economic Outlook Dims as More Plan to Pull Back Investment," The Wall Street Journal, Dec. 1, 2015, available at

8 Gerhard Colm, "The Revenue Act of 1938," 5(3) Soc. Res. 255 (Sept. 1938), at 277.