Subject: Tax Reform Comment: And still the Halls of government, K Street and the media buzz with the malapropos question: shall we lower benefits, raise taxes or increase the debt, to pay for the reform of social security? To which, now they have added the bellow about raising taxes to pay for Katrina and Rita. In fact, the only sound way to pay for any of this is by raising productivity. But how? Necessity is the mother of invention, and with so much demand upon our resources, immediate and pressing as well as pending and waiting, we have an opportunity and need to refule America's great productive machine with a root and branch tax reform. We got off on the wrong foot: by proposing social security reform before tax reform, the administration got the cart before the horse. And now we have the additional load on the cart of hurricane damage. But, carts don't draw horses. Certainly no tinkering with the tax code as has been proposed, retaining the covert social engineering scams of deductions for this and credits for them, is likely to generate the kind of productivity needed to float and support such reforms as the President is proposing for social security. The only sound way to generate the needed productivity is by repealing the anti-productivity taxes on incomes and success, and the 16th amendment to the Constitution that gave them legitimacy and replacing them with either a tax on consumption such as proposed by Senator Jim DeMint ( S25) ( http://demint.senate.gov/index.cfm?FuseAction=SponsoredBills.Home ) or a transactions tax such as proposed by Dr. Edgar L. Feige ( www.apttax.com ) , a tax of choice, not compulsion. These reforms would unleash such a fount of productivity as to make reform of the rest of an antiquated system, including social security, possiblible WITHOUT cutting benefits or raising taxes. This recent Front Page of the New York Times carried something of a surprise. http://www.nytimes.com/2005/03/04/politics/04tax.html?th Here's the lead, by Edmund L. Andrews WASHINGTON, March 3 - Alan Greenspan, the Federal Reserve chairman, cautiously endorsed a shift in the nation's tax system on Thursday from one that primarily taxes what people earn to one that taxes what they spend. Remarkable! A ways down, comes this quote from testimony given by Greenspan before the President's Advisory Panel on Tax Reform: "Many economists believe that a consumption tax would be best from the perspective of promoting economic growth - particularly if one were designing a system from scratch - because a consumption tax is likely to favor saving and capital formation," Mr. Greenspan said. Greenspan was speaking to one of the stated goals for tax reform, as given to the President's Advisory Panel. They are to suggest reforms that will. "promote long-run economic growth and job creation, and better encourage work effort, saving, and investment, so as to strengthen the competitiveness of the United States in the global marketplace." And he was right, many economists do believe that, "a consumption tax would be best from the perspective of promoting economic growth " Dr. Tom Sowell speaks for many of them, http://www.townhall.com/columnists/thomassowell/ts20041125.shtml We could stop taxing productivity and start taxing consumption. After all, productivity is what makes a society more prosperous. Someone who is adding to the total wealth of this country is not depriving you of anything. But someone who is consuming the nation's wealth, without contributing anything to it, is. Yet our tax system penalizes those who are producing wealth in order to subsidize those who are only consuming it. So too does Professor Walter Williams, http://www.townhall.com/columnists/walterwilliams/ww20041222.shtml Abolition of the IRS and the income tax code it enforces, replaced by a national sales, would create greater economic incentives, enhance personal privacy, and lower tax compliance cost by an estimated 90 percent. In the Wall Street Journal , Lawrence Koltikoff, Chairman of Boston University's Economics Department sums up some conclusions bout the consumption tax. My colleagues and I have been studying income and consumption taxation via computer simulations for some time now. We've found that switching from taxing wage and capital income to taxing consumption can significantly improve economic efficiency and growth. What's more, it can make our tax system much more progressive and generationally equitable. The results if a tax on consumption replaced the current taxes on incomes, inheritance etc.? According to Professor Koltikoff,: Over the next few decades, the FairTax would likely raise U.S. GDP by 15% relative to its alternative value. Here's why. The FairTax generates much bigger incentives to work and save. It also redistributes from rich older spenders to younger savers. Andrews also points out in his Times piece that, The Economic Report of the President, published last month, argued that consumption taxes could increase personal savings by as much as 43 percent in the first year and ultimately lead to higher output and higher wages. "By removing the tax on the return to savings and investment, a consumption tax would increase savings and investment," the report contended. "With a larger stock of capital, workers would be more productive and output and wages would rise." But, as I suggested above, there are also broader advantages. The tax system is part of a larger antiquated system that includes the social security program. Current efforts to reform the latter detached from reform of the tax system are stymied by debate over whose ox shall get gored and in what way" shall we raise rates or lower benefits. The savings in enforcement and compliance costs from abolition of the incomes, payroll death and other anti-growth taxes, and the revenue generated by the additional productivity arising from switching to a tax on consumption, a tax of choice instead of compulsion, would make reform of the rest of an antiquated system, including social security, possiblible WITHOUT cutting benefits or raising taxes. Although he seems himself to favor the so called "flat tax," Bruce Bartlett, senior fellow for the National Center for Policy Analysis. admits ,http://www.townhall.com/columnists/brucebartlett/bb20050112.shtml , that it is "a consumption-based tax system, which most economists now support." Besides economists, the consumption or transaction tax already has bipartisan support from legislative sources as diverse as Congressman Chaka Fattah (D-PA) and Congressman Tom Delay (R-TX ). See also this study by Texas Republicans http://www.fairtaxvolunteer.org/news/PR060404.pdf Yet, even more significant than the support of economists, the consumption or transaction tax has the support of the voters, who have endorsed it when ever a politician has had the courage to propose such tax reform. vide Bob Novak's list of successful encounters. ( http://www.townhall.com/columnists/robertnovak/rn20041111.shtml ) Another goal set for tax reform, is that it should, Simplify Federal tax laws to reduce the costs and administrative burdens of compliance with such laws. Simplify? Certainly there is no contest here. The tax reform that is simplification par excellence is the substitution for the current tax system of a consumption tax. Chris Edwards, director of fiscal policy studies at the Cato Institute, points out the simplification of a consumption tax. http://www.cato.org/pubs/pas/pa-416es.html Not only does the so-called flat tax continue the confiscatory withholding system -- something that per se would undoubtedly horrify most of the writers of the Constitution.-- but it still requires individuals to track expenses and file forms, it still requires businesses, and this is especially costly and onerous to small businesses, to record expenses and to provide contingencies and expenses for audits. The forms may be simpler than the current system of many thousands of pages of regulations, too complex for even the IRS to keep track of; that is to say very little indeed What if the bill proposed to institute the consumption tax were passed? Professor Koltikoff ( in his WSJ piece reference above) : Assume H.R. 25 becomes law. Overnight, people would move from paying, to the feds and states, roughly 50 cents per dollar earned on their supplies of labor and capital to roughly 30 cents. Because the relationship between tax rates and economic distortions is non-linear, this would reduce the excess burden of our tax system by roughly two-thirds! A very conservative estimate of this annual saving is 2% of GDP or about $250 billion for the coming year. Add in the aforementioned $250 billion in wasteful tax compliance, and we're talking big bucks. Unlike the flat tax, the consumption tax is inherently simple: it eliminates filing for individuals and for businesses, except for the sales tax -- with a system already in place for state taxes in many places . The consumption tax is not only the simplest tax, it is also the most efficient and the least expensive tax. It eliminates the IRS, an onerous and fundamentally un-American agency ( prosecutor-judge-jury all in one ), thus also the operating cost of that agency-- more than $10 billion to operate in 2002. Finally it eliminates the compliance costs to taxpayers of more than $200 billion a year. Even proponents of the flat tax, as John Fund points out in his Wall Street Journal piece, http://www.opinionjournal.com/diary/?id=110006352 admit that there is really no chance that a "flat tax" once enacted would remain flat. Former House majority leader Dick Armey, a pioneer in promoting the flat tax, privately admits that Congress is unlikely to abolish tax deductions for mortgage interest and charitable contributions, but there is lots of room for President Bush's tax reform commission to propose a dramatic flattening of the income tax code. We are also told that reform should, Share the burdens and benefits of the Federal tax structure in an appropriately progressive manner while recognizing the importance of homeownership and charity in American society, "Share the burdens'? The burden in the current system, as well as in the so called "flat tax" is unfairly borne by honest people who are law abiding in their transactions. Whole segments of the economy go untaxed in these systems an underground economic activity that currently evades taxation by going unreported and uncollected. Barrons http://online.barrons.com/article/SB110445261525213540.html reports that this underground economy in the US is "about $970 billion, or nearly 9% of the real economy. It should soon pass $1 trillion." Only a consumption tax can capture a fair tax from this underground economy. Taxes lost under the current system, but that would be captured under a consumption tax could virtually wipe out the federal budget deficit. "In an appropriately progressive manner" Appropriate progressivity of the burden is maintained in a consumption tax by exempting the necessities of life such as food and medicine. A consumption tax that eliminates such necessities is, in fact, inherently progressive: those who have the most money normally engage in the largest consumption and the most expensive transactions and would therefore pay most of the tax. As Professor Gilbert E. Metcalf of Tufts University, an economist with the National Bureau of Economic Research, point out, there is no problem building progressivity into a consumption tax. http://www.cato.org/pubs/pas/pa-289.html " While recognizing the importance of homeownership and charity in American society." Homeownership and charity are important values, but should the tax collection system be used to promote them? So if the consumption tax has so many advantages, why is there so much resistance to it? Although both experts and voters favor it , the politicians and special interests have colluded to prevent the enactment of this promise. And why? Professor Williams points the reason from the stand point of the pols: The two most powerful congressional committees are the House Ways and Means Committee and the Senate Finance Committee. Both dispense tax favors to different Americans that come at the expense of other Americans. With a sales or flat tax, their Santa Claus roles, not to mention campaign contributions, would be diminished. On top of that, they'd have restricted opportunities for social engineering through fiddling around with the tax code. Andrews points the reason from the standpoint of the special interests: James A. Baker III, who was treasury secretary when President Ronald Reagan pushed through a tax overhaul in 1986, warned the panel of the political minefields. Mr. Baker noted that the Reagan administration originally proposed a sharp limit on the mortgage-interest deduction to reduce tax rates as much as possible. But that provoked a storm of protest from the real estate, construction and home-finance industries. Only by capitulating, Mr. Baker said, was it possible to pass a bill that sharply lowered tax rates and eliminated scores of special tax breaks. There is something fundamentally dishonest in using a revenue system for promotion of such objectives. Reform lite, which is what is assumed by all the public buzz, is certainly a capitulation to special interests and political expediency. But, it is also a scam that perpetuates the core of a new deal redistributionist tax system by a slightly differently skewed system of social engineering. Deductions for mortgage and charity and credits for children are fundamentally dishonest -- giving back a bit of the money, confiscated by the government for programs and policies that are, in the first place, not the legitimate provenance of the federal government. Such politically appealing scams would be unnecessary if the money were not confiscated in the first place. In addition, they provide a justification for maintaining the whole corrupt system that seeks to buy or reward voters and contributors for continuing or putting a party or politician in power -- it is per se corrupt and no amount of attempted justification of a corrupt system by remitting part of the corruption for good ends such as homeownership or marriage and family stability can justify the continuation of the corruption. If it is desired to make homeownership easier or to promote family stability, surely there is enough ingenuity in the private sector to satisfy this desire. It should not become the raison d'etre for maintaining an anti-productivity tax system which has become the main stay and enabler of the total antiquated system, including the disfunctional scam of Social Security. At some point we need to ask: why should the tax code discriminate in favor of home buyers as opposed to renters? We need to ask: why is it the business of government, whether I spend my money on a collection of books or give it to charity? We need to ask: why are these matters the business of government and what they have to do with a system of revenue raising? We need to ask: why do "conservatives" think such matters are a proper concern of a national government? We need to ask: what part of the Constitution mandates such a use of a revenue system for social engineering? There is no question that we need reform nor as to the best method of reform; the only question is will the President and the Congress have the courage to enact it? Will they dare to put the people ahead of the special interests and political expediency and hide in the timidity of the conventional? |