Will WE Ever Get Tax Reform? (The Politics of Tax Reform, by GWB Economic Advisor)

American Enterprise Institute ^ | 11/4/97 | Larry Lindsey

[Leto]

We have heard that GWB may be looking at Fundamental Tax Reform, many at FR have an interest in this topic. Although this article is from 1997, it does show the thinking of one of GWB cheif economic advisors on the subject of Tax Reform.

What make this article interesting, is the historical context, and the insights into the politics of getting things done in DC. The budget implications and how the vested interest groups will fight to protect their turf.

[Leto]

Ping

[45Auto]

"The hard thing is not how to get Congress to do something, the hard thing is to get them to STOP." - P.J. O'Rourke

[45Auto]

The problem is one of semantics: the word "reform" to a politician means "screw the public."

[Leto]

PJ Nails it. A lot of discussion goes on between the NRST group, and the Flat Taxers and skeptics. I thought this article on the process and traps would be of interest.

"THe road to Hell is paved with good intentions." -Leto's mom (I don't know who originated this, but mom made sure I knew it.

[Sonny M]

I know O'Neill has made studying the issue, and tax reform a priority for him, and many close to him have stated that once he gets some kind of tax reform, he'll probably leave. Personally, I'd rather see Steve Forbes at the treasury tacking the issue. He can help bring about meaningfull and lasting change in tax reform that can benefit all americans, equally and for the best.

[Leto]

There seems to be rumors that O'Neill will leave in the next couple of months.

I think next year there will be some tactical moves on taxes, ending the Alternate Minimus Tax, reducing taxes on cap gains, making the tax cuts permanent and some stuff for lower income tax payers.

I think that real tax reform will not happen until after the 2004 election and that assumes a big Bush/GOP victory, things will be run up the flagpole between now and 2005.

Lindsey seems to lean towards a Flat Tax and away from a Sales TAx.

[ancient_geezer]

"THe road to Hell is paved with good intentions." -Leto's mom (I don't know who originated this, but mom made sure I knew it.

Then their are those who start on no road at all out of fear of failure ending up in the same place.

The road may be narrow. There is, however, still a road to be traversed.

[ancient_geezer]

Lindsey seems to lean towards a Flat Tax and away from a Sales TAx.

In 1997, and before HR2525, in any case. This is 2002 and quite a bit of water has flowed over the bridge since then.

I do note in this '97 article Lindsey is silent on the issue of retail sales taxes. It will be of more interest to know where he is today, and whether or not his views will hold much sway in the long run.

The Flat Tax, among other things, has been shown to be a VAT, which Lindsey was clearly not in favor of.

[Leto]

Then their are those who start on no road at all out of fear of failure ending up in the same place.

The road may be narrow. There is, however, still a road to be traversed.

Very true, any comments on Lindsey's approach to Taxes and navigating the political rapids?

[Leto]

If you go back to the Dan Mitchell article from the Heritage foundation, he gives a clear explanation of the difference between a Flat Tax and a VAT, So I must disagree about a Flat Tax being a VAT.

The Tauzen bill was in the works in 97 along with the Armey bill, the part about politicans and their desire to preserve their power is what caught my eye.

One of the most detestable things about taxes is the buying and selling of tax benefits, and the desire of many to control economic behavior and outcomes through Taxes

[John Lenin]

I like the Tax system just the way it is. If they change it will be for the worse.

[ancient_geezer]

To maintain a broad base and low rates we must find a mechanism to make tinkering unpopular. More to the point, we must find a way of making it so that the marginal voter is opposed to changes in the tax code, or at least so that Congress thinks that is the case. We are dealing with political economy, not economics, and our focus should be on the fact that political economy, like markets, is a dynamic process.

What I believe to be the key of Lindsey's points.

HR2525 provides the mechanism by being a single rate visible tax with a pre-paid monthly tax payment offset paid to everyone rich and poor.

The monthly offset meets the requirement for the bottom end wage income folks to meet their tax payments yet participate in and resist increases in the levied tax rate. Any shifts in the tax system incidence causes an increase in rates for everyone.

The key is maximum participation and perception of the tax, while providing a basis of self interest to keep the system in place.

The Flat Tax system, by maintaining personal exemptions, taxes on business and not removing payroll taxes, provides the illusion of free lunch for those most dependant on government largess and panders to the idea of the rich guy and nasty of businesses paying the piper.

[Leto]

As youknow I can easily live with HR2525 (ot the Tauzen NRSTIF the 16th amendment is repealed). I do however the battle with the socialist will never end, ("The Price of Freedom is Eternal Vigilance").

I live in a State with both an Income Tax and a Sales Tax. Special interest are constantly fiddling with what is covered. In the case of the NRST, there will be calls to exempt cerain items from the tax, Food will be one... to 'help the starving children' and 'for working families'. I realize that there is an exemption for a rebate that would make this unecessary, but since when would that matter to rat politician like Clinton?

In the case of the Flat Tax the battle will be to reintroduce other rates for the "Rich" so they pay their "Fair Share".

I don't believe the rats will ever give up on class warfare. Class Warfare the Race Card and Entitlement programs are who they get their base to vote.

[Leto]

I like the Tax system just the way it is.

You forgot the /scarcasm tags :-)

[ancient_geezer]

gives a clear explanation of the difference between a Flat Tax and a VAT, So I must disagree about a Flat Tax being a VAT.

 

Perhaps you will explain the difference to us?

The Flat Tax is a VAT implemented with an individual Wage Tax.

The computation of a VAT is :

Taxrate*(Sales less purchases) = Taxrate*(GrossIncome - investment)

You must apparently disagree with Hall & Rabushka, the architechs of the Armey Flat Tax.

The Flat Tax; Chapter 3, by Robert Hall and Alvin Rabushka

In our system, all income is classified as either business income or wages (including salaries and retirement benefits). The system is airtight. Taxes on both types of income are equal. The wage tax has features to make the overall system progressive. Both taxes have postcard forms. The low tax rate of 19 percent is enough to match the revenue of the federal tax system as it existed in 1993, the last full year of data available as we write.

Here is the logic of our system, stripped to basics: We want to tax consumption. The public does one of two things with its income—spends it or invests it. We can measure consumption as income minus investment. A really simple tax would just have each firm pay tax on the total amount of income generated by the firm less that firm’s investment in plant and equipment. The value-added tax works just that way. But a value-added tax is unfair because it is not progressive. That’s why we break the tax in two. The firm pays tax on all the income generated at the firm except the income paid to its workers. The workers pay tax on what they earn, and the tax they pay is progressive.

To measure the total amount of income generated at a business, the best approach is to take the total receipts of the firm over the year and subtract the payments the firm has made to its workers and suppliers. This approach guarantees a comprehensive tax base. The successful value-added taxes in Europe work this way.

***

The other piece is the wage tax. Each family pays 19 percent of its wage, salary, and pension income over a family allowance (the allowance makes the system progressive). The base for the compensation tax is total wages, salaries, and retirement benefits less the total amount of family allowances.

 

Concerning Proposals for a Flat-Rate Consumption Tax
Before the Joint Economic Committee, Statement of Robert S. McIntyre
Director, Citizens for Tax Justice May 17, 1995

• The Hall-Rabushka flat tax, and its Armey and Specter variants, would replace the current personal and corporate income taxes with a new tax that is conceptually identical to a "subtraction-method" value-added tax, a version of a national sales tax, with two major modifications: First, imports would be exempt from the flat tax, while exports would be subject to tax. Second, to mitigate the regressivity of the VAT, cash wages, pensions received and other cash earned income would be taken out of the VAT base (i.e., deducted by businesses) and taxed directly to individuals, with exemptions. Thus, structurally, the flat tax is exactly equal to a value-added tax with an import incentive, an export disincentive and a personal rebate based on a percentage of a capped amount of cash wages, pensions and other earned income.Businesses compute a typical "subtraction-method" value-added tax by adding up their taxable gross receipts and subtracting the cost of previously taxed items. Thus, in computing the VAT, businesses deduct their purchases from other businesses, whether for supplies, services, machines, land or whatever.

[John Lenin]

You forgot the /scarcasm tags :-)


No sarcasm tags, the only way to change the tax code is to destroy the US economy. No thanks !

[ancient_geezer]

The Tauzen bill was in the works in 97 along with the Armey bill, the part about politicans and their desire to preserve their power is what caught my eye.

The Linder/Peterson bill (H.R.2525) which came after was expressly written to address the deficiencies, political and economic, of both.

[ancient_geezer]

One of the most detestable things about taxes is the buying and selling of tax benefits, and the desire of many to control economic behavior and outcomes through Taxes

I can certainly agree with that.

However, one is not about to alleviate those problems by retaining any form of the income tax, or by using income based business taxes, as history has very amply demonstrated. Such taxes always lend themselves to definition of what is income versus what is allowable as a deduction. VATs and bracketed income taxes, being outside of the perceptions of the majority of the electorate through exemption and non-participation, such shennanigans are the rule of the day.

[Leto]

When I refered to the VAT (and I believe when Lindsey refers to a VAT) I am refering to a Eurpoean style VAT where products have a tax added at each stage of the production process. THe tax is at a lower rate and is "hidden" from the consumer. A single item is taxed at multiple points. A NRST like 2525 avoids this problem by taxing the item only at the point of sale.

In the Case of the Flat Tax it depends on How the tax is implemented (and in any tax reform proposal the devil is in the details!) Some proposals, tax Corporate profits (gross revenue minus plant, equipment and wages) then taxes the employee wages, In this case the revenue is taxed only once at it's point of origin. Ohter variations remove all business taxes, and tax the vusiness owner (shareholder) dividends (or in the case of stock sales capital gains) at the same rate as any other income. This is to avoid the political canard of the 'rich' not paying taxes on their interest income.

The current system is a real VAT also in the case of business income and captal where revenue is taxed 2-3 times and rates going well over 50%.

It is interesting that Hall Rabushka and Mitchell describe the Flat Tax as a Consumption tax the same as an NRST such as HR2525 or the Tauzen NRST.


Thanks for the link!