November 30, 2012

WE ARE ALL NEOCONOMISTS NOW:

Actually, conservatives should favor even fewer people paying income tax (Reihan Salam, SEPTEMBER 20, 2012, Reuters)

[R]epublicans, Mitt Romney included, should give serious consideration to Michael Graetz's Competitive Tax Plan (CTP).

Conservatives hate the idea of new taxes. But imagine if every time you bought a cup of coffee, it said on the receipt that you had also just paid a 12.3 percent consumption tax to the federal government. Instead of paying your taxes once a year, you would pay taxes every time you made a purchase. What better way to remind people of all of the money government spends, and all of the money government spends foolishly, than to make them pay for government several times a day?

That's not all. Imagine also that the federal income tax only applied to income over $100,000 for married couples, $50,000 for single filers, and $75,000 for head of household filers. Households that earn less than this "family allowance" would be under no obligation to file a federal income tax return. In that case, the 12.3 percent consumption tax would pay for liberating millions of Americans from the IRS. According to a recent analysis from the Tax Policy Center, the tax policy rules in effect today will require 147,540,000 tax units to file taxes in 2015. Under Graetz's CTP, that number would fall to 36,625,000.

Even those poor souls who still have to file under the CTP will benefit, paying a much-reduced federal income tax at a basic rate of 16 percent and a surtax rate of 25.5 percent on income above $200,000. These low marginal tax rates would improve work incentives for high earners far more than Mitt Romney's proposed tax cut and would be an even bigger improvement relative to President Obama's proposed tax increase for the top 2 percent of households. And though the CTP wouldn't completely eliminate taxes on savings and investment, it dramatically lowers them, particularly for families of modest means.

One concern is that even with this radical shrinking of the income tax, poor families that spend the bulk of their income would pay more under a consumption tax. That is why the CTP includes a generous per-worker and per-child rebate that would be used to offset payroll taxes. These rebates would also serve as a replacement for the earned-income tax credit, which is the chief reason tens of millions of low-income households have to go through the hassle of filing income tax returns. The end result is that the tax burden under the CTP would be exactly as progressive as it is under today's tax rules.

The CTP would strike a blow against the IRS's intrusiveness, a cause all conservatives should cheer. And as Graetz explained to me, "by eliminating millions of people from the income tax, you'll never get them back." Once the inflation-indexed exemption is raised, "you'll never get a politician to agree to lower the exemption from $100,000." It has many other benefits as well. For example, while Mitt Romney has called for a 25 percent corporate tax rate and President Obama has called for a 28 percent rate, the CTP cuts the corporate rate to 15 percent. In one fell swoop, this would make the U.S. a far more attractive destination for foreign investment, reduce tax avoidance and be conducive to economic growth.
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Posted by at November 30, 2012 5:09 AM
  
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