Tax reform: It’s one of the few areas in politics “where I think there’s at least the possibility of Republicans and Democrats working together to actually accomplish something,” said Bruce Bartlett, Fiscal Times columnist and author of a new book, The Benefit and the Burden: Tax Reform – Why We Need It and What It Will Take. “Everybody understands that something needs to be done.”
That may be wishful thinking, since Bartlett believes that President Obama “threw cold water” on any bipartisan effort in his State of the Union address by asking for several new tax preferences. Obama called for doubling “a special deduction available only to companies engaged in manufacturing, something that most tax specialists think should instead be abolished,” says Bartlett. All told, Obama’s proposals “do not move in the direction of tax reform.”
The leading GOP presidential candidates are no better. Bartlett says that Romney’s and Gingrich’s tax plans are non-starters. “To be blunt, they’re simply lying. If you’d like to say that they’re suffering from cognitive dissonance – fine. But they know perfectly well their proposals are complete nonsense. They won’t work.”
A widely published policy analyst (in addition to writing for The Fiscal Times, he is a contributor to The Financial Times, the Economix blog of The New York Times, and Tax Notes), Bartlett served in both the Reagan and George H. W. Bush administrations as well as on the staffs of congressmen Ron Paul and Jack Kemp and Senator Roger Jepsen. Bartlett expects continued robust debate on tax reform in the next year or two, although the trick will be how to get “from here to there, both politically and substantively.”
Excerpts from our conversation with the author:
‘Republicans Deny There Are Two Parts to the Deficit Equation’
The Fiscal Times (TFT): You believe that while government spending should be reduced, higher revenues are also necessary to stabilize our finances. Why should a goal of tax reform be “to make a higher tax burden more bearable”?
Bruce Bartlett (BB): Everybody complains about deficits and the debt. If they’re right that this is a problem, then they have to concede that at some point higher taxes are the lesser of evils. The problem is that Republicans simply deny that there are two parts to the deficit equation. You can either have higher spending or lower revenues – and basically our problem is both. But they just pretend that revenues have nothing to do with it, even though revenues right now are at a historical low of about 15 percent of GDP, versus a postwar average of 18 ½ percent of GDP. If we were at 18 ½ percent of GDP in revenues, we would be in much better shape – and that’s about where we would get to if we allowed the Bush tax cuts to expire, which nobody wants to do. So I think revenues need to be higher.
TFT: It’s the dead-weight cost of taxation, you say – the production, labor, investment that doesn’t occur because of the way our tax system is structured – that’s at issue. How would you change this?
BB: Taxes on investment and saving are high dead-weight costs, while taxes on property, real estate, wages and consumption tend to have low dead-weight costs. It’s why economists always talk about moving to a consumption-based tax system. It would let us raise the same revenue at a lower dead-weight cost. So it’s kind of a free lunch. If we’re going to have to raise the tax-GDP ratio, it’s all the more imperative to reform the tax system so as to reduce the dead-weight cost. You can afford to pay several percentage points of GDP in terms of lost output when the tax-GDP ratio is as low as it is right now. But if we raise our taxes up into the 20 percent of GDP range, then the dead-weight cost becomes much more painful, and we need to reduce it to prevent these higher taxes that I believe are necessary and inevitable from slowing economic growth.
‘Replace the Income Tax with a Value Added Tax’
TFT: Would you replace the personal income tax completely, or layer on a VAT as well?
BB: As a practical matter, we’d have to have both, but I’d consider replacing the income tax with a value added tax. The problem is that having no income tax at all would mean the wealthy would pay nothing, basically. And I’m sure that for Warren Buffett, the percentage of his income that goes to consumption is a tiny fraction, whereas for the average person it’s very high. So it would be a distributional nightmare. Since nearly half the people who file income tax returns pay no income tax at all, eliminating the income tax would also eliminate things like the earned income tax credit. So the almost 50 percent of the people who now pay nothing would pay a substantial amount of value added tax. That’s a real problem.
It makes a lot more sense to use the VAT as a supplemental revenue source to avoid raising tax rates in the future. I estimate we could get about $50 billion per percentage point of VAT. So a 20 percent rate, about what they have in Europe, would raise a trillion dollars a year of gross additional revenue. You could get rid of the alternative minimum tax and make the Bush tax cuts permanent. You could do all those things in a revenue-neutral manner if you had this additional revenue source.