Forbes, June 4, 2012
A Progressive Consumption Tax?
by Len Burman
Len Berman is the Daniel Patrick Moynihan Professor of Public Affairs at
the Maxwell School of Syracuse University, a research associate at the
National Bureau of Economic Research and the Center for Policy Research, and
co-founder of the Tax Policy Center (TPC). He has also worked for the US
Treasury and the Congressional Budget Office.
... consumption taxes ... , unlike an income
tax, ... not penalize saving. The Achilles Heel, however, has been that
consumption taxes tend to be regressive ...
low-income people spend all their income (or more) while those with higher
incomes save a substantial portion. Thus, the sales tax or the VAT tend to
be most burdensome on those struggling to get by. In 1981, economists Robert
Hall and Alvin Rabushka proposed a less regressive kind of VAT called the
Flat Tax. Businesses pay a flat tax rate on revenues less expenses (cash
flow) and workers pay the same flat rate on earnings above a basic exemption
level. The tax base is exactly the same as for a very broad-based VAT
except for that exemption. ... David Bradford, extended the flat tax idea by
incorporating progressive tax rates on wages.
...
their new book, Progressive Consumption Taxation: The X Tax Revisited,
... published by the American Enterprise Institute ... takes “fairness†very
seriously (and doesn’t rely on the convenient wishful thinking of assuming
that trickle down would deal with all distributional issues). The book cites
President Bush’s tax reform panel, which concluded that a very comprehensive
X Tax could mimic the distribution of tax burdens under the current (circa
2005) income tax with rates ranging from 15 to 35 percent so long as there
are refundable tax credits to replace the EITC and child tax credit. The
authors also acknowledge that rates would have to be higher if tax breaks
for homeownership, health insurance, and charitable contributions are
preserved. Thus, it is easy to make the case that a fair X Tax is feasible,
at least in theory.
...
exempting saving from the tax base doesn’t magically simplify the tax system
(since taxpayers would have a huge incentive to make taxable earnings look
like tax-exempt savings). They say what almost all economists know, but few
consumption tax advocates admit, which is that switching to a consumption
tax—even with a border-tax adjustment—would not represent a subsidy to
exports, and they recommend against the border adjustment on simplicity
grounds.
...
However, the X Tax still needs a better name.
2-4-8 Response: The X Tax vs. the Nuclear
Option
I initially disagree to suggest that the "X Tax" may be
aptly named to represent an almost incomprehensible tax reform for a problem
that does not exist. One should not have to buy the book to understand that
hefty taxes would be levied on bank withdrawals and borrowing with the
intent that the new tax code would compel maximization of savings by the
middle class by overtaxing cash needed for spending. The regressive nature
of this tax is obvious but proposed to be overcome by a tax credit to
replace the child and earned income tax credits of the current income tax.
It is not clear why the retirement tax incentives of
the IRA and 401k are not sufficient incentive for middle class saving. The X
Tax would not significantly contribute to the consumption that creates new
jobs and produces profit for the business owners. The X Tax would simply
encourage a few to amass more wealth through lower taxes – but our current
income tax code with its many tax expenditures (a/k/a "loopholes") already
excels at that objective.
If bold tax reform is your interest, I can share a
proposal that heals the middle class and the economy with a net wealth tax -
the nuclear option in tax reform (powerful [$55 trillion base], efficient,
fair and controversial). It can be described in one sentence:
Tax individual and corporate income at a flat 8% rate
(with no deductions, credits or loopholes), tax individual net wealth at 2%
(excluding $15,000 cash and retirement funds) and impose a 4% Value Added
Sales Tax (VAT) on business.
The 2-4-8 Tax Blend has the lowest rates and will
produce about $500 billion more than current federal revenue [around 18.5%
of GDP] with no need for payroll, estate, and capital gains taxes or
deferral of foreign income.
Eugene Patrick Devany, JD, MPA
www.TaxNetWealth.com
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