August 14, 2014


Another tax reform solution: taxing consumption (Charles Lane, August 13, 2014, Washington Post)

In his latest paper, published by the National Tax Journal, [Michael J. Graetz, a former Treasury official in the first Bush administration and longtime advocate of radical tax reform who teaches at Columbia Law School] contends, plausibly, that the 1986 tax reform worked because it was then possible to pay for rate reductions by eliminating billions of dollars in individual and corporate tax shelters without tackling middle-class breaks like the mortgage interest deduction.

Today, though, there's less low-hanging fruit; a 1986-style reform would be politically difficult because it would be financially difficult, as Camp's plan and similar attempts at "revenue-neutral" reforms suggest.

Even if our politicians did manage to push this boulder up the hill, Graetz notes, it would roll right back down. At the behest of lobbyists, Congress began fiddling with the 1986 reform almost as soon as it was enacted, giving us today's loophole-ridden mess.

The United States' real problem, according to Graetz, is its undue dependence on income taxes -- corporate and individual -- in the first place. He supplies a nifty world map with all nations shaded except the ones that don't have a value-added tax (VAT), essentially a sales tax on goods and services imposed at each stage of their production and distribution. It's striking to see the United States grouped with Burma, Saudi Arabia, Afghanistan and exactly zero developed nations.

Graetz would put a 12.9 percent VAT at the center of a new system -- using the revenue to slash the corporate tax rate to 15 percent and eliminate income taxes for all households earning less than $100,000 ($50,000 for singles), that is, 80 percent of current filers.

For those above that threshold, there would be two rates, 16 percent and 25.5 percent. Payroll tax rates would stay the same, with credits for low-income workers to offset the regressive impact of the VAT, as well as an additional child tax credit.

Graetz points to independent analyses showing this would raise about as much revenue, about as progressively, as the current system. It could spur growth by reducing uncertainty and perverse incentives -- of which "tax inversions" are but one example. By taxing consumption, it would encourage savings and investment, but not steer them in politically favored directions, as the current code does.

Posted by at August 14, 2014 2:51 PM

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