February 9, 2003

LEAP FROG:

White House Floats Idea of Dropping Income Tax Overhaul (EDMUND L. ANDREWS, February 8, 2003, NY Times)
President Bush, having already set off a firestorm over his proposals to cut taxes and revamp retirement accounts, suggested today that the time might be near to drop the income tax as a whole and replace it with some form of consumption tax.

The idea was outlined in the White House's annual economic report to Congress. The report, prepared by the White House Council of Economic Advisers and signed by Mr. Bush, offers a scathing critique of the current system and an exuberant description of radical alternatives. [...]

By eliminating the complexity and the thousands of arcane preferences in today's tax code, the report says, a consumption tax would not only increase efficiency but promote investment and growth.

"Most estimates suggest that a shift to a consumption tax base would generally increase the size of the capital stock in the long run," the report said. Economic output could increase as much as 6 percent, it added.

Michael Graetz, a professor of tax policy at Yale Law School and a longtime advocate of a tax on consumption, said the report was a clear signal about the administration's long-term thinking.

"It's unusual for something like that to be in the economic report of the president," Mr. Graetz said. "I don't believe the president has made a decision about what he would like to do. On the other hand, this shows they are serious about fundamental tax reform." [...]

At its simplest, a consumption tax would eliminate traditional income taxes for most if not all taxpayers and replace those taxes with some kind of tax on spending. Corporations might still pay taxes, but they would abandon most of the rules for depreciating investment in new equipment or buildings and simply write off those costs as expenses in the year they occur.

The allure of such systems is their simplicity. Fans of the consumption tax said it would save ordinary taxpayers billions of dollars, eliminate the wasteful gaming of current rules and ultimately be more fair. [...]

Republican lawmakers and policy analysts generally doubt Mr. Bush will push for a radical tax overhaul anytime soon, given his already sprawling agenda of a likely war with Iraq and the huge tax bills he
wants to push through this year.

But if Mr. Bush succeeds in pushing through his current agenda, and wins re-election in 2004, the report could turn out to be a blueprint for his goals in a second presidential term.


One of the greatest mistakes Ronald Reagan ever made was to run his re-election campaign in 1984 on only a feel-good message, rather than running on a couple big ideas. This left his second term rather directionless, so that all he really achieved was the continued focus on defeating the Soviet Union, which is no small thing, and a temporary jiggering of the tax code, but one amenable to folks like Bill Bradley.

It's a risky strategy--and incumbents are risk averse--but President Bush should run on a complete tax overhaul and privatization of current entitlement programs. One way that he could detoxify the tax issue and get himself a salesman who would allay peoples' fears is to get John McCain on board. If we take Senator McCain at his word about how much he wants to get special interests out of the business of government, nothing would have a greater effect than to simplify the tax code and get rid of the Byzantine system of tax breaks we now have. Lobbying and campaign donations are sound business investments when you can get a line added to the tax code thay will repay your efforts many times over. Remove the payoffs and you'll reduce the efforts to secure them.

Posted by Orrin Judd at February 9, 2003 6:35 AM
Comments

I think age, weariness, the dismantling of the Baker-Meese-Deaver trio and the entry of Don Regan had more to do with the second term's lack of impact.

Posted by: M Ali Choudhury at February 9, 2003 8:07 AM

But Regan, for all his faults, was a capable man. Had he had some tasks to accomplish he would have.

Posted by: oj at February 9, 2003 8:39 AM

Going to a consumption tax will restore much needed honesty in funding government. For instance, businesses pay the taxes levied on them. But consumers fund the payments. Therefore, the amount of those taxes are carefully hidden from the voters who actually provide the funds.



Respectfully,

Jeff Guinn

Posted by: Jeff Guinn at February 9, 2003 9:43 AM

Does it not bother you at all
that a consumption tax would be as regressive as the current code is progressive? I'd rather just have a flat income tax, if radical tax reform can't be avoided.

Posted by: Charlie Murtaugh at February 9, 2003 11:20 AM

Charles:



Progressive taxation is similar to affirmative action, pretty words to cover the government treating people unequally. If the poor actually paid for government maybe they'd ask for less.

Posted by: oj at February 9, 2003 11:28 AM

The thought that RR's second term was wasted except for causing the implosion of the Soviet Union has put a smile on my face that is going to be there all day.



As for progressive taxation, I highly recommend Walter Blum's The Uneasy Case For Progressive Taxation
. Since the book was written, the case for progressivity has gone from uneasy to unquestionable. But we have come to the end of the road.



By insisting that every tax increase and cut must be ever more progressive, the government, and particularly the state governments, have made themselves ever more dependent upon the last 10% of the income of the "rich." As it turns out, that income is incredibly variable and is the first income lost in a soft economy. When the economy softens, capital gains tax revenues, excise tax revenues, sales tax revenues and income tax revenues drop by a much greater percentage than average income drops. All attempts to make the tax code more progressive only increase this effect.



Having said all that, consumption taxes make me very nervous. A value added tax, for example, would hide the effects of taxation from the individual taxpayer even more than the current withholding system does. It would also shift the costs of collection from the government to every business in the country in yet another hidden tax. These issues can all be designed around, but the effort to do so will depend upon the virtue of government.

Posted by: David Cohen at February 9, 2003 12:25 PM

David:



Second terms are a notorious waste of time--has anyone had a good one?

Posted by: oj at February 9, 2003 6:14 PM

George Washington, Calvin Coolidge and Ronald Reagan.



I ruled out Wilson on a technicality. Reagan gets in because, first, he walked communism right up to the cliff and, second, he wasn't Walter Mondale.

Posted by: David Cohen at February 9, 2003 8:32 PM

David - I suspect what they're moving toward is a consumption tax that's very visible to taxpayers and progressive - all you have to do is exempt from taxation income that's invested, and voila, you have turned the income tax into a consumption tax. This greatly simplifies the tax code because the biggest complexity is calculating income -- it comes in calculating business "profits" and in allocating these to individuals. It's relatively easy to audit how much money someone is spending, difficult to audit how much profit a business earned.

Posted by: pj at February 9, 2003 8:32 PM

If that's what their going for, PJ, then the three new types of tax prefered savings accounts proposed in the budget gets us pretty close to the target.

Posted by: David Cohen at February 10, 2003 9:05 PM
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