Skip Navigation Links., Feb. 6, 2012

Tax reform in this election year: It's not likely

by Tom Raum

Mr. Raum opines:

... Politicians of all stripes in this presidential election year are clamoring for simplifying the tax code and closing loopholes. But that would mean Americans would lose some of their prized deductions. Not that Congress actually is likely to end tax breaks for home loans or religious and charitable contributions anytime soon.

... Overhauling the complex U.S. tax code could mean that for everyone who would pay less someone else would pay more. And every existing provision in the code has its advocates."Tax reform is ferociously difficult. If you tackle it straight up, the likelihood of success is rather small," said Henry Aaron, a senior fellow in economic studies at the Brookings Institution. "Whenever you try to take money away from somebody, they will fight harder to keep it than will those who stand to gain."

... "To get comprehensive tax reform, you have to have tremendous presidential leadership. There's no way around that to be successful," said Douglas Holtz-Eakin, who was the director of the Congressional Budget Office from 2003 to 2005 and now heads the American Action Forum, a conservative public policy institute.

... Economist Bruce Bartlett, author of "The Benefit and the Burden: Tax Reform — Why We Need It and What It Will Take," is not optimistic for major tax reform no matter who wins the election."I think the most we can hope for is a modest improvement to fix some glaring problems in the code," he said. As to those calling for starting from scratch with a whole new tax system such as the so-called fair tax or flat tax, "I don't believe that's going to happen," Bartlett said. "I think that's just a political non-starter."

2-4-8 Response

I accept that, “starting from scratch with a whole new tax system” is a “political non-starter” … but there is always next year. Moreover, we should be able to discuss a better or a “whole new” tax system while the presidential race helps to focus our minds to the big picture. I understand why most entrenched politicians, tax attorneys, economists, accountants and even business writers have difficulty thinking outside the box on tax reform. The terms “group think”, “tunnel vision”, “vested interest” and “don’t rock the boat” are just a few that come to mind. The general public, on the other hand, is much more open to major tax reform and that is why there was excitement in Cane’s “9-9-9 Plan”. The public can also see that most incremental reforms like Obama’s Buffet Rule or even Perry’s flat tax have unintended consequences which make the proposals unfair. The public is also 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 Buffet Rule rate) 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 year’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 President’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 also important to consider that deductions such as mortgage interest are not needed because the homeowner would get the benefit of deducting the mortgage principal in computing net wealth. A similar benefit would apply to those with credit card and student loan debt. Over the years, as debt is paid off and wealth was accumulated, the taxes paid would obviously be a little more. The blend of taxes, taken together, is progressive even thought the rates are the same for all.

It is hard to imagine anyone that wouldn’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 stated as he waited for someone to find a flaw in the plan rather than the obvious lack of political will).

The 2-4-8 Tax Blend expands the tax base to achieve the lowest possible rates (while yielding about the same government revenue). Upward mobility is encouraged by lowering the tax burden on earned income. A corporate tax rate of 8% should be a very big plus for job creation and the economy.

Eugene Patrick Devany, JD, MPA


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