X Tax would add rev­enue, re­ward sav­ing, in­vest­ment

Austin American-Statesman - - BALANCED VIEWS - FROM THE RIGHT Mon­day Tues­day Wed­nes­day Thurs­day Brooks writes for The New York Times. Fri­day Satur­day Sun­day

In

1986, Democrats and Repub­li­cans came to­gether and en­acted a tax re­form mea­sure that closed loop­holes and low­ered tax rates. That was a great achieve­ment. The ’86 act has shaped think­ing ever since. Now when peo­ple talk about tax re­form, they in­stinc­tively say, “Let’s do an­other ’86-style act.” When they de­bate tax ideas, they in­evitably fix­ate on the two levers that were cen­tral back then: clos­ing loop­holes and chang­ing top mar­ginal rates.

The prob­lem is that it’s not 1986 any­more. We have a dif­fer­ent set of prob­lems. The two levers high­lighted in that ear­lier re­form are not pow­er­ful enough to help us ad­dress the is­sues we face to­day. The 1986 par­a­digm has be­come an in­tel­lec­tual straight­jacket, fore­clos­ing con­sid­er­a­tions of the things we ac­tu­ally have to do.

Un­like in 1986, the baby boomers are now in full re­tire­ment mode. The ag­ing pop­u­la­tion means more government spend­ing, even if we get en­ti­tle­ment pro­grams mod­er­ately un­der con­trol. It also means slower growth. The United States grew at about 3.2 per­cent a year for the five decades af­ter World War II. It is pro­jected to grow at only 2.2 per­cent over the next few decades.

We need a tax re­form that will raise rev­enue and sig­nif­i­cantly boost growth. The 1986 model is poorly de­signed to do both those things.

Let’s say we closed loop­holes or capped item­ized de­duc­tions at $50,000, as many cur­rent pro­pos­als would do. That would raise, at most, about $760 bil­lion over 10 years. And it would pro­duce much less than that if we started carv­ing out ex­cep­tions for the char­i­ta­ble de­duc­tion, as we should. That rev­enue wouldn’t be close to cov­er­ing the tril­lions in new debt.

Let’s say we raised the top tax rates back to where they were un­der Pres­i­dent Bill Clin­ton. That wouldn’t come close to rais­ing suf­fi­cient rev­enue ei­ther. It might raise $82 bil­lion a year, ac­cord­ing to the Joint Tax Com­mit­tee. That’s small pota­toes com­pared with what’s needed.

Let’s say we closed the loop­holes and raised rates all at once. That might the­o­ret­i­cally pro­duce enough rev­enue, if you hit the mid­dle class, but it would dec­i­mate growth.

Even the 1986 re­form, which closed loop­holes and low­ered rates, didn’t do much to in­crease growth. Even af­ter the re­form was passed, peo­ple were paying the same amount in taxes, so they faced the same ba­sic in­cen­tives.

If you closed loop­holes and raised rates, then you would make the in­cen-

Kath­leen Parker

David Brooks

Ross Douthat

Ramesh Ponnuru tives worse. Rais­ing top tax rates may not be as cat­a­clysmic for the econ­omy as some have ar­gued, but this is still one of the most growth-killing ways to raise rev­enue.

In other words, if we’re go­ing to si­mul­ta­ne­ously ad­dress our two most press­ing needs — rais­ing rev­enue and boost­ing growth — we’re go­ing to have to break free from the 1986 par­a­digm.

That means ask­ing the ba­sic ques­tion: What is the sin­gle big­gest prob­lem with the tax code? It’s not the com­plex­ity, bad as that is. The big­gest prob­lem is that it re­wards con­sump­tion and punishes sav­ings and in­vest­ment.

You can’t fun­da­men­tally ad­dress that prob­lem within the 1986 par­a­digm. You can ad­dress it only through a con­sump­tion tax. This idea is off the ta­ble right now, but re­al­ity will in­evitably drive us to­ward it. We have to have a con­sump­tion tax if we want to both grow the econ­omy and re­duce debt.

But isn’t a con­sump­tion tax re­gres­sive since poor peo­ple spend a big­ger share of their in­comes than rich peo­ple? The late David F. Brad­ford of Prince­ton Univer­sity ef­fec­tively solved that prob­lem with his so-called X Tax, which has re­cently been cham­pi­oned by Alan D. Viard of the Amer­i­can En­ter­prise In­sti­tute. Un­der the X Tax, you wouldn’t pay the con­sump­tion tax at the cash reg­is­ter. Busi­nesses would be taxed on their cash flow, tak­ing an im­me­di­ate de­duc­tion for in­vest­ments rather than de­pre­ci­at­ing them over time. House­holds would pay tax at pro­gres­sive rates on their wages but would not pay tax on in­come from sav­ings.

The X Tax taxes the money you spend right now and re­wards sav­ings and in­vest­ment. The government could raise a chunk of rev­enue this way and sig­nif­i­cantly boost growth with lit­tle or no change in how tax bur­dens are dis­trib­uted be­tween rich and poor. Most econ­o­mists vastly pre­fer con­sump­tion taxes to in­come taxes.

The other com­plaint is that a con­sump­tion tax is po­lit­i­cally im­pos­si­ble to get passed. But there would also be huge po­lit­i­cal dif­fi­cul­ties if we try to do an­other 1986-style act next year. Ev­ery spe­cial in­ter­est will fight ev­ery loop­hole clos­ing. And af­ter all that, the coun­try would get very lit­tle ben­e­fit in re­turn. The po­lit­i­cal bar­ri­ers to an X Tax are no greater, and we would ac­tu­ally ad­dress our prob­lems.

It’s time to break out of the 1986 par­a­digm. It’s time to ex­plore con­sump­tion taxes. Let’s think about X.

Amity Shlaes Charles Krautham­mer

Ge­orge Will

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