Tax Reform: 'Think Different' in 2014

Tax Reform: 'Think Different' in 2014

"Think Different" was an Apple ad slogan in the late 1990s that propelled the company through many innovative products and helped make it the titan that it is today. As the White House prepares for the State of the Union address and House Republicans prep for their upcoming congressional retreat, both need to think different themselves if they wish to boost their standing in the eye of the public. One way to do this could be to pioneer innovation in the realm of tax reform.

Up until this point, tax-reform efforts have moved at a glacial pace behind the scenes, with legislators focused on adjusting the current income-tax rates and broadening the base, reminiscent of the 1986 Tax Reform Act and other historical efforts. The two top tax writers, Senate Finance Committee chairman Max Baucus (D., Mont.) and House Ways and Means Committee chairman Dave Camp (R., Mich.), should be commended for their determination and drive to make tax reform happen these past two years.

But is there a way to think different instead? Longtime political columnist Al Hunt recently penned a provocative "Letter From Washington." He said, "a 1986-style tax reform-- broadening the base and lowering the rates -- is not politically achievable today." I would add "not economically desirable." Hunt embraces a tax-reform proposal by Yale Law School professor Michael Graetz: a value-added tax (VAT) with an income tax for higher-income Americans and investment. While I disagree on the specifics, I believe that Hunt gets something right: It might be time to stop trying to fix the income tax and consider a consumption tax -- specifically a consumed income tax, which is similar to an income tax with an exemption for savings and investment-- with built-in provisions so that lower-income people aren't penalized.

It may sound far-fetched in the current political climate, but it isn't a one-sided partisan issue. Senator Ben Cardin (D., Md.) has embraced the idea of a "progressive consumption tax." He would like to reduce the corporate income tax rate to 15 percent, and his plan exempts taxes on consumption up to $25,000 while eliminating individual income taxes for people earning less than $100,000. Congressman Paul Ryan, in his "Roadmap for American's Future Act of 2010," would replace the corporate income tax with a 8.5 percent business consumption tax.

Why a consumed income tax? Economists have written over the years that switching to a tax base that primarily depends on consumption rather than income could increase saving, investment, economic growth, and job creation.

The American Council for Capital Formation recently analyzed plans put forth by the President's Advisory Panel on Federal Tax Reform in 2005, including the progressive consumption tax and a hybrid tax structure that would move the current tax system toward a consumption tax while preserving some features of income taxation.

Under a progressive consumption tax there would be no taxation of capital income at the household level, thus eliminating the need for special savings accounts such as IRAs, 401Ks, and health-care savings accounts to keep track of the exemption. All new business investment would be expensed immediately, which would encourage capital formation, economic growth, and job creation. Both individual and business cash flow would be taxed at three rates: 15, 25, and 35 percent.

Further, because a consumed income tax can be made progressive, it can be made "fair" no matter how one defines that term. In these difficult economic times, it's also fair to not tax people who save for things like tuition, health care, and retirement.

A consumption-tax system is also much simpler than the income tax. Taxpayers can fill out a one-page form and be done with it -- income and savings are the only numbers needed to determine the tax owed?. If one is willing to pay the price of complexity, it is also possible to design either of the advisory panel's options to keep some provisions of the current system that are popular with middle-income taxpayers, such as tax deductions for interest on your home mortgage, the exclusion from your income of health cinsurance provided by your employer, and tax breaks for charitable contributions.

Finally, unlike a VAT, a consumed income tax would not be an additional tax that complicates the overall system because the current income tax is transformed into a consumption tax.

To paraphrase former Treasury Secretary Larry Summers, liberals will go for the VAT when they figure out it's a money machine and conservatives will go for it when they find out it's regressive. The American people will go for a consumed income tax because it avoids these shortcomings and is fair, simple, and efficient.

Lowering the tax barriers will help the next Apple innovate and our economy prosper. But first the White House and Congress must look forward and think different.

Mark Bloomfield is president and CEO of the American Council for Capital Formation, a nonprofit, nonpartisan organization dedicated to public policies supportive of saving and investment to promote long-term economic growth, job creation and competitiveness.

Show commentsHide Comments

Related Articles