Opening For Bi-partisan Consensus on Tax Reform
Time For Bi-partisan Consensus on Tax Reform
Two former communications directors at OMB, one for Bush II and one for Clinton, argued for bi-partisan tax code reform this week in the Baltimore Sun.Noam Neusner and Lawrence J. Haas said the time is ripe for a consensus that would lower federal income tax rates and broaden the tax base.
Politically, tax reform would broaden the budget debate. By promising lower tax rates on a broader base of income, tax reform would enable Congress to eliminate special-interest tax provisions that lawmakers would more likely protect as part of the annual budget process – things like write-offs for domestic manufacturing or for farming as a hobby.
And then there’s the policy benefits. Tax reform can unlock a lot of good ideas.
On Social Security, tax reform could mean lowering tax rates on worker wages – a plus for conservatives – while raising the current threshold of just under $100,000 on wages subject to taxation – a plus for liberals. The resulting increase in total Social Security revenues could close the funding gap for future benefits – a plus for everyone.
On health care, tax reform could lower the deductibility of health insurance benefits, which appeals to conservatives, while also appealing to liberals by raising funds to bolster Medicare’s long-term solvency.
Congress could use tax reform to pursue a bolder path: Reduce our reliance on the income tax and create a consumption tax. That would please conservatives who believe a consumption tax would spur savings and investment, as well as liberals who think the nation needs more revenue to strengthen Social Security and Medicare and address other priorities.
Putting the merits of a consumption vs. income tax aside, there are enormous benefits to broadening the tax base. For starters, it would create horizontal neutrality, meaning those with similar incomes would pay roughly the same in taxes. Doing so reduces the inequity of giving tax credits to some and not to others. It also promotes efficiency in the economy because people will make economic decisions based on choice and preference, not tax benefits. That leads to greater social welfare.
Second, people will pay their taxes if the system is perceived to be simple and fair. Preferences complicate an already complex system which discourages people from filing their taxes. The Tax Foundation calculates that criminal evasion reduces the tax base by eleven percent – roughly the same amount as credits and exemptions combined. Credits generally benefit those that are politically favored which adds to the notion that some are being unfairly taxed. Efforts to mitigate the unfairness create a downward spiral of more credits and deductions that ultimately make the code less simple and less fair.
Last, any effort by the new majority in Congress to ensure ethical behavior amongst its members must address the giveaways and preferences that are the catalyst for many of the violations. Spending limits on lunches, gifts and “junkets” simply won’t do. Credits on the tax side that favor specific industries are no different than showering those industries with pork on the spending side.
Neusner and Hass are correct that the time is right for tax reform. It is now up to our lawmakers to take this opportunity to do the right thing before it is lost.
It seems to me that many elements are lining up for collaboration on such a bold reform. I’m stoked.
37 Responses to “Opening For Bi-partisan Consensus on Tax Reform”
“Time For Bi-partisan Consensus on Tax Reform”
Tax reform, sure. But Bi-Partisan? Why? When the GOP rammed their bills through House and Senate, where were the media voices calling for Bi-Partisanship?
There might be a need to get consevative Senators on board to prevent filibustering, ok. But beyond that, there isn’t any reason for Dems to pay much respect to republican concerns about shifting the tax burden back to those who received all those gifts all those years. Times have changed.
bi-partisan support is better than active resistance. The more they cooperate the less ammunition they have at election time.
Progressive flat tax. Full stop. I’m not sure why this isn’t being embraced by everyone.
That’s a good question.
Why wouldn’t congress adopt the most simple method?
Could it be that taxes would most increase for those who give the most money to campaigns?
Paul that’s the only logical explanation I can think of. I would have to argue however that a bigger “real” explanation is the fact that the flat tax was originally designed to treat everyone “equally” and thus act as a regressive tax.
Like many libertarian related ideas, the original idea came from an ideology that a minority of the populace respects and the idea was forever poisoned. Now that there are updated proposals, these are seen only as a Trojan Horse.
Of course we shouldn’t take them at their face value, but I’ve read many people I respect and have been persuaded that a tax can be created that is simple and doesn’t drastically alter its burden on the lower-middle classes. It’s also supported by many conservative economists who predict that the increase in efficency will create enough growth that eventually the rich are gaining more wealth than they would have even while paying more in taxes.
Oh I should add that the same might not be true for certain “corporate interests” who right now are playing the game in a way that is contrary to free market principles anyhow. C Stanley has a book of links about this, I don’t have them on hand.
Flat taxes may seem fair but they aren’t. 20% tax on someone making $25k/year and having to spend every penny of it to make ends meet is considerably more crushing then 20% on someone who is in a position to put half of their takehome in a saving account or investment.
There are some basic needs or life that have to be met, shelter, food, healthcare. People in the lowest income brackets don’t have any excess money after paying for these things, which prevents them from saving anything. This results in an almost total lack of upward mobility which brings a host of other issues into play. Long story short, equal burden isn’t always equally fair.
Heh. Because it’s an oxymoron?
Even Friedman recognized the need for a highly progressive tax rate (though lower overall levels) and he proposed a pure negative income tax for the poor (rather than the half-measure of the EITC).
Thanks for illustrating my point. That’s where the “progressive” in “progressive” flat tax comes in. Forbes had a suggestion. The numbers are…loose at this point from my understanding but the idea is there. Please read and comment.
A consumption tax is ridiculous.
Proponents of the consumption tax are usually paid shills of rich people who want to eliminate taxes on investment, income, and the estate. They should be dismissed immediately.
Here’s one of the basic problems:
Eliminate all income taxes and have a consumption tax? You cannot raise enough money to support the government without a very high consumption tax, which would be extremely regressive.
Their solution? Well, let’s not tax people on necessities, like food. Wait, why should caviar be tax free while school books are not? Well, we can say some kinds of food, not fancy stuff. You’re going to have a government commission classified EVERY single purchasable item?
What about keeping some income tax and adding some consumption? Congratulations, you’ve succeeded in significantly increasing the complexity of the tax code.
It’s a joke.
The Pigou Club is far more sensible.
Again, it’s not a flat tax. It’s a euphemism for cutting top marginal taxes (on the rich). Do not buy into their lies.
The government CAN NOT function with the amount of income proposed by Forbes or any of the other flat and/or consumption taxers.
As Milton F. also said, to spend is to tax. We must eventually significantly raise taxes to cover the massive spending we are doing now. No reasonable growth forecast comes close to covering it.
All of the current attempts to “reform” the tax code are funded by the wealthy and businesses who hope to avoid this long term tax liability.
Do not buy into their lies.
Tax reform? A smoke screen.
“Progressive flat tax. Full stop. I’m not sure why this isn’t being embraced by everyone.”
Maybe because it’s nonsense? Really, I first thought you’re joking. Well, a tax can only be progressive OR flat, those characteristics are mutually exclusive. And now let’s look why Forbes is confusing things:
“Under Steve Forbes’ plan the flat rate would be 17%. All families would get generous personal exemptions, so that a family of four would not pay taxes until its income exceeded $46,000. To encourage growth, the Forbes plan exempts income that is saved and invested.”
Ha! That’s essentially a REGRESSIVE tax with a tax excemption. The more you earn, the LESSER is your effective taxrate, because you can afford to save and invest more. Does anybody here doubt that middle class taxpayers invest a lower percentage of their income than millionaires?
Well, this is only marginally simpler than the current model, but brings an enormous potential of savings for the rich. Well, what do you expect from multimillionaire Forbes?
Andrew you just conflated two separate but interrelated topics. Of course we can’t run on the amount of income Forbes proposes. That has nothing to do with the tax system though; we can’t run on a progressive income tax either. When we’re blowing billions of corporate subsidies, terrible social proscriptions and tons of bombs, it’ll have to start raining gold to support our habits.
Income taxes also hurt lower class people from building wealth. I’ve done the math and figured out that it’s very easy for anyone to build up a great deal of wealth (assuming current growth rates which you can argue about but again is separate) if you start early enough even on a lower-middle class budget. I’m not blaming anyone that doesn’t do it, I’m just stating it.
I am concerned that a consumption tax would create more stratification by encouraging the wealthy to not spend. However I also believe that ultimately who becomes wealthy or not is a reflection of our society and that a progressive consumption tax allows the average person more power in deciding their life.
As a progressive, my concern is thus education and personal self-sacrifice to make sure that everyone has the resources to make use of this freedom and not be taken advantage of.
I’d also say that by far the #1 problem for everyone (but especially the lower-middle classes) is over consumption and spending too much, not taxes. If a consumption tax on non-essentials helps curb this it’d do much more for progressive ideals than most other suggestions.
Gray62 in my case I’m using progressive very losely as in “not burdening” the lower classes instead of “higher incomes pay a greater percentage.” Also by self-sacrifice I meant me (collectively progressives themselves) lowering my lifestyle and taking time to help the situation not “oh you need to cut back on food or pay for drugs, it’s not my problem you’re poor” or writing a check to charity at the end of the year and complaining the government isn’t doing enough.
Mikkel, I’m not interested in getting a basic training on your special language. English spoken here. Period. A progressive tax is a progressive tax is a progressive tax. It’s not a synonym for some weird ideas of yours.
You’re right. People are over-consuming things like life saving medical care, and thus going bankrupt.
…OK so by trying to explain why this could further help progressive ideals/politics liberalism etc. and saying that the current tax code has a very specific adjective attached to it that I’m not talking about, it should all be rejected. What one thing have I written that you object to outside of the preconceived notion of what it should be.
I have no idea what that post means, Mikkel.
Yeah Andrew and I wouldn’t support a consumption tax if it taxed medical care. So really the middle class would be in better shape on that front and let’s be realistic, the poor can’t afford it anyway and the structural changes needed to get them access is completely a separate topic.
Of course I would argue that it can be expected that the medical care cost would rise even faster because then people would have more money they’d be willing to spend on it…but again that is a structural issue about our society. The reason why medical care costs so much is everyone is trying to maximize their profit off it and the demand is non-elastic. If there were a “progressive” (using my weird definition) viewpoint where social structures were set up that had the goal of making the most people healthy then this would change.
But obviously the current people with power won’t ever put that up so it’s up to progressives (in the full sense, which includes lots of “conservatives” like the religious) to try to change things. My argument is that the current tax system limits this ability.
Oh Andrew that wasn’t to you, it was to Gray objecting to my use of “progressive” in a way that wasn’t referring to the meaning it has when attached to “progressive tax.” I was talking about the underlying aims of progressivism…albeit poorly, but instead of trying to figure it out he was deriding it and I was asking why.
“we can’t run on a progressive income tax either”
Well, of course you can! Britain ran on such a tax for a very long time, until the governement realized that the wealthy were leaving the country in droves. There’s the problem. Just for comparison: The maximum income tax rate in the UK in 1978 was 83%.
“instead of trying to figure it out he was deriding it”
And rightly so, I think. Sorry, but when you INVENT new meanings for clearly defined words, the whole idea of having a discussion is ridiculous.
Just one question, Mikkel: Are you already in the income range where the AIT hits you? If yes, you should be more concerne about the long overdue adjustion of this tax then about some new, crude tax reform proposals…
You know, that brings up a big problem with a consumption tax: what prevents people that can afford it from just buying all their big ticket items outside the country? Is the IRS going to come in and check all your sales receipts?
This is already seen on the internet where technically you’re suppossed to pay taxes on the goods you buy to your home state. That actually might be a fatal flaw in the whole idea.
“AIT”? Oops, of course it’s the AMT, the alternative minimum tax…
“Is the IRS going to come in and check all your sales receipts?”
Possible. But more likely, the US Customs Service will get you. Of course, you are supposed to voluntarily report any sales from doreign countries and pay the difference between the tax rates. So, iuf you’re honest, you won’t save anything by buying abroad. At least that’s how the system works in Europe.
Haha yeah I still figured it out. No I’m not in it and yes you’re right that’s like hundreds of times more pressing. If you want my real thoughts on what the actual state of things is instead of theoretically how things could be different, I don’t believe our current tax system is that bad. I wouldn’t mind a progressive (in the real sense of the word) income tax that just had all the stupid loopholes cut out.
The bigger problem is that tax law written to help those that aren’t rich is often abused by the rich and tax law aimed at the rich catches those that aren’t. Then of course there’s the tax law written to help the rich.
This creates situations like having a poor (literally and figuratively) little old lady not be able to get Medicaid to pay for drugs because she is keeping her 1500 sq ft house to pass to her kid, while a millionaire can pay less in inheritance tax than her kid will because he set up an estate.
That is all just wonderful justification for a rather high estate tax rate.
http://www.taxreformpanel.gov/
Here is where you can see what the last bi-partisan commission recommended.
I think it was skewed by some requirements from Bush that may not still be necessary. Such as accounting for personal SS accounts…
“I wouldn’t mind a progressive (in the real sense of the word) income tax that just had all the stupid loopholes cut out.”
Mikkel, now we’re talkin’ business!
Only difference seems to be, I’m extremely sceptical that tax reform proposals, coming from multimillionaires, are really intended to eliminate loopholes
“That is all just wonderful justification for a rather high estate tax rate.”
And for keeping the inheritance tax as it is, Andrew!
If you believe the poor little old lady’s kid will have to pay anything in inheritance tax, you’ve just been fooled by Bush. Even before Republicans got their hands on that tax, it didn’t affect any estates of less than $2 million. I hardly doubt that many poor little old ladies such as the one you describe would have estates of that size. If so, they wouldn’t be described as poor and wouldn’t have to worry about getting on Medicaid in order to afford their perscriptions.
As for the original topic, we need something more simple and streamlined. No matter what that tax is collected on, we also need to make sure poor people can afford the necessities and that our budget defecits can be worked on before they cripple the country. This means a progressive rate in some form is necessary. I have no doubt that these needs could be met with either an income tax or a consumption tax but the bottom line is they won’t get met without some serious changes that will have to come with bipartisan support. The longer we wait to meet these needs, the more dire the future looks. If they are not met relatively soon, I’m not sure I want to be around when this all blows up in our faces. I don’t think I’m exaggerating when I say it could be the downfall of the nation.
Perscriptions? I decided to spell fonetikle today (based upon Wisconsin pronunciations, yadereh).
“If you believe the poor little old lady’s kid will have to pay anything in inheritance tax, you’ve just been fooled by Bush.”
Most of the time, yes. What does the economistsview say about this?
“At the current $2 million exemption level ($4 million per couple) only one in every 200 people who die in 2006 will owe any estate tax at all.”
So, it all depends on the location of the house
Mikkel, any plan that involves the line “Using economic modeling, Kotlikoff and I found that under our flat tax the rich would bear more of the burden than they currently do.” Is far from simple, and undoubtably has some loopholes. Really, I can’t wrap my head around what they are proposing. I do however like some of their ideas such as conditional tax rebates, but they would have to be paired with massive educational funding.
In general, I think the idea of not taxing investment/savings is wrong both practically and ideologically. On the ideological level, taxes are levied against a person because that person benifits from the maintenance of the general society. We have police, we have the military, FEMA (in theory), and especially important to this discussion, we have the Treasurey, which issues governement bonds, and federal bank insurance. Basically, all personal investment is dependant on the stability and security of government bonds and banks. Without these public goods, it would be much, much harder, if not impossible to make money investing. Therefore I find nothing wrong in theory with taxing investments.
On a practical level, not taxing investments allows the accumulation of tax-free income for the wealthy, but not the poor.
In the big scheme I think the fairest, simplest tax would be a progressive tax on net assets, but there are a few small problems with that, like say, the fact that the entier world would have to get on board to prevent stashing assets in another country. In the mean time. I’d say why not do away with the distinction between different types of income, treat captial gains the same way you do regular income.
Why directly tax citizens at all? Since corporations and businesses have the money for lobbyists and political payoffs let them bear the entire tax burden and battle it out in congress as to how to pay the government. Yes the tax burden would ultimately be born by the consumer but companies like Wal Mart would be battle furiously over reducing their share of the tax burden in order to keep prices low for their lower income customers. The corporations would be the ones to hire the legions of accountants and tax lawyers, we would have no forms to fill out or concerns about tax brackets.
“I’d say why not do away with the distinction between different types of income, treat captial gains the same way you do regular income.”
Exactly! Why should lazy heirs, who live from capital gains, be favored over hard working citizen? Makes absolutely no sense to me. That’s not the american way!
Exactly. So how many people in the top 0.5% of this country in wealth are classified as “poor” little old ladies? The top 0.5% can afford an inheritance tax and don’t have to depend on Medicare to afford their prescriptions.