A Purple Plan for the Red and Blue Super Committee
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By Laurence Kotlikoff,
The Fiscal Times
September 23, 2011

Dear Super Committee members,

You are six senators and six congressmen. Half are blue Democrats and half red Republicans.

You know why you’re here. This summer’s debt-ceiling fight is still on. You’ve been selected to duke out a minimum of $1.2 trillion in budgetary savings. Otherwise, on November 23, $1.2 trillion in automatic, across-the-board budget cuts kick in.

Meeting in the same room won’t be easy. You reds can’t stand you blues, and you blues can’t stand you reds. 

Let me help. I’m the purple (as in blue plus red makes purple) messenger. I’m writing on behalf of the gods to help you find common ground, starting with the tax system.

Which gods? All of them. Every god from every religion met last week at the ICDD – the International Congress of Devoted Devines. They’re sick and tired of your bickering. Keep screwing around and, well, don’t ask.

I’m writing you in your own language because you can no longer tolerate each other’s choice of words. 

So blues, read only what’s in blue. Reds, read only what’s in red.  Also, don’t peek!  The Gods are testing you. They’re eager to zap the first 11 peekers. They figure the last politician standing can agree with herself.

Blues, here’s your game plan. You’re going to push for a tax on wealth, with the proceeds used to lower taxes on wages. But you’re going to do it by agreeing to what many far-right Republicans have been advocating – replacing the federal personal and corporate income tax with a federal retail sales tax. Those mean-spirited Republicans think a sales tax is regressive.  It’s not.  They’re confused. And you’re going to exploit their confusion. 

A sales tax taxes wealth for the simple reason that when you spend your money, a chunk of it goes for taxes. Take your buddy, Warren Buffett.  He’s now paying taxes at preferential capital gains and dividend rates on the income from his assets. He’s paying no taxes on principal. A sales tax hits that principal. 

Let’s be concrete. Warren has $40 billion. If we impose a sales tax at a 17.5 percent rate, prices will rise by 17.5 percent and the purchasing power of Warren’s $40 billion will immediately drop by 15 percent.  Divide $40 billion by 1.175 and you’ll see that Warren’s $40 billion now buys only $34 billion in goods and services --15 percent less. 

What if Warren doesn’t spend his wealth? No diff. Day One his purchasing power is down 15 percent and whatever money he leaves his kids and whenever he leaves it will buy 15 percent less.

The story gets better. Republicans are willing to provide a monthly payment to each household based on its size to offset the sales taxes alleged regressivity. This “demogrant” (George McGovern’s coinage) is large enough to cover all of the sales tax payments of poor households. 

A sales tax also reduces the purchasing power of wages. So agree to the sales tax conditional on making the 15.3 percent FICA payroll tax progressive.  How? By eliminating the ceiling on earnings subject to the tax as well as the employee half of the tax on the first $40,000 of earnings.

As a sweetener, offer to eliminate the corporate income tax. This tax drives companies out of the country and leaves workers with fewer jobs and lower wages. The gods have done the math and run the numbers. The corporate tax is a big loser from your perspective, but the Republicans will think you’re making a huge concession.

Finally, offer to dump the estate and gift tax in exchange for a 15 percent tax on inheritance and gifts received above $1 million. The estate and gift tax is easily avoided and represents a full employment act for lawyers. People should be able to leave large estates tax-free as long as they spread them out over many people.

Remember, the gods are with you on this.  They know the Republicans are fiscally challenged.

Reds, listen up. Those self-righteous Democrats think you’re rich and hate the poor. Many of you are poor and just want Uncle Sam off your back. You want a simple, transparent, and progressive tax system, which doesn’t encourage wasteful spending. The gods are with you on this. They can’t stand the Democrats. And they’re sure Sam’s an agent of the ICDD – the Interdenominational Consortium of Dedicated Devils. 

You know that flat rate, federal retail sales tax many of you have been pushing to replace the personal income tax, the corporate income tax, and the estate tax?  Offer to collect it by taxing what rich people used to spend on consumption – their wealth and wages. And point out that by hitting up the rich, you’ll be able to tax poorer workers at a lower rate.  Tell them you want to collect the taxes as a 15 percent tax on wealth and wages.  Sweeten the deal with 1) a monthly demogrant large enough so that the poor pay no tax on net; 2) a change in the payroll tax to make it highly progressive; and 3) a 15 percent tax on inheritance and gifts received above $1 million.

Here’s the beauty of this.  All tax rates are 15 percent.  If the Democrats push to spend more on anyone or anything, they’ll realize that that single 15 percent tax rate will have to be raised, and they’ll say fuggedaboutit.

Back to collective reading. If you peeked, expect a visit from the ICDD. You know which one.  Otherwise, visit www.thepurpletaxplan.org for more instructions, and then agree to precisely what your enemies suggest.  But wait till the last minute.  The gods are a bit devilish.  They like a good fight that ends well. 

Laurence J. Kotlikoff is a professor of economics at Boston University.