The Washington Post, January 31, 2012
Major tax reform: Why it always fails
Robert J. Samuelson
was a columnist for Newsweek magazine from 1984 to 2011. He is the author of
Great Inflation and Its Aftermath: The Past and Future of American Affluenceâ€
Mr. Samuelson opines:
Almost everyone favors â€œtax reformâ€ in the abstract: Broaden the tax base by
reducing deductions, credits and other tax breaks, and then cut top tax
rates. But this sort of sweeping tax reform is usually a political
the special breaks that complicate
the tax code and push up top rates. Manipulating taxes to favor or disfavor
particular industries, groups or regions is a source of power that Democrats
and Republicans alike are loath to surrender. Thatâ€™s why major tax reform
fails, despite routine endorsements from both parties.
â€œLet businesses and families make economic decisions without being biased or
even pressured to do one thing rather than another, such as buy rather than
rent a home, just because the tax system makes it worthwhile,â€
[quoting Bruce Barlett].
By contrast, many politicians view the tax code as a tool to reward or
punish various constituencies and causes.
Itâ€™s easy to imagine a better income tax. The top rate would be no higher
than 30 percent. There would be no special rate for capital gains. Most tax
breaks, including the deductions for mortgage interest and charitable
contributions, would be eliminated or reduced.
I am a tax reform advocate and a failure â€¦ so far. I also understand why
most entrenched tax attorneys, economists, accountants and even business
writers have difficulty thinking outside the box on tax reform. The general
public, on the other hand, is much more open to major tax reform and that is
why there was excitement in Caneâ€™s â€œ9-9-9 Planâ€. The public can see that
most incremental reforms like Obamaâ€™s Buffet Rule or even Perryâ€™s flat tax
have unintended consequences (and you correctly note, â€œhow much taxes
distort behaviorâ€). The public may also be in a better position to separate
tax reform from the much more contentious spending issues.
I believe that bold reform will not happen unless the media accurately
reports that income, sales and even net wealth can be part of an expanded
tax base to produce the same amount of revenue in a much better way.
At the risk of oversimplification, try to contrast a 30% income tax (the top
rate you suggest) with an 8% income tax combined with a 2% wealth tax for
each of the next 11 years. The latter combined tax would permit an
individual to keep 22% more salary each year and tax another 2% of the
amount not consumed for the next 11 years. If one saved the 22% for 3 years
it would be like having a yearâ€™s take home in the bank on top of what might
have otherwise been saved under a 30% flat tax rate (conservatively assuming
the 2% wealth tax was offset by 4% investment interest).
In August of 2006, I made the following suggestion to the Presidentâ€™s
Advisory Panel on Tax Reform: tax Net Individual Wealth at 2%,
Consumption/Sales at 4% and Income at 8%. The exact same rates apply to the
rich and poor. There are no different tax brackets, credits, and no
favoritism. The three taxes would yield about $2.6 trillion per year
(slightly more than the current combination of Income, Social Security,
gasoline and other federal taxes and fees).
It is hard to imagine anyone that wouldnâ€™t welcome a 2% tax on net wealth
and a small 4% sales tax, in exchange for drastically reduced 8% individual
income tax rate. Even the "fair and balanced" Bill O'Reilly (a/k/a the
Factor) supports a national sales tax (of 3%) as a necessary component of
tax reform. The concurrent elimination of social security, capital gains,
estate and gift taxes; and a significant reduction of the corporate income
tax rate to 8% should guarantee near universal support from social liberals
and business conservatives alike (he defiantly declared as he waited for
someone to find a flaw in the plan rather than a lack of political will).
Eugene Patrick Devany, JD, MPA