Tax Reform: Consumption and Carbon
Incoming congressional leaders have placed reform of "the insanely complex [income] tax code" at the top of their to-do list, but the only thing more complex than this code may be its reform. Here's a proposal that reaches far beyond anything under consideration on the Hill -- and could be easier to enact.
The grand bargain: Junking virtually the entire personal and corporate tax regime, Congress embraces a consumption tax coupled with a carbon/methane tax -- via constitutional amendment. The new federal tax system would consist of a VAT or retail consumption tax set at about 10 to 20 percent of the value of all goods and services sold in the U.S., with a carbon/methane tax add-on of perhaps 2 to 10 percent. If the plan fell short of replacing current revenues, income above a given amount would be taxed at a flat rate of 3 to 15 percent to make up the difference.
In exchange for applying the carbon and consumption brakes favored by the Left, the Right would get a constitutional amendment that would keep Congress from inflating the rates set by the original bill. States would have to ratify (a) a repeal of the 16th Amendment (income tax) and (b) a cap on consumption-tax rates at the percentages specified by Congress. Emergency assessments could breach the rate caps by supermajority congressional votes and would automatically lapse, say in six months, unless supermajorities subsequently voted to continue them.
A spillover flat tax, if needed, would apply only over a congressionally specified level of income, e.g. $70,000, with no other deductions. For those squeamish about enshrining a tax regime in the Constitution, note that federal tax law and rules now exceed 50,000 pages; our bet is that the country has had its belly full of such tripe and would gladly chuck it for perhaps ten paragraphs in the Constitution.
Goody Bag For the Left: You'd get a tax system that penalized consumption with an overlay of carbon taxes in a mixture you helped craft (because constitutional amendments require congressional supermajorities). Widespread replacement of carbon fuel by renewables would be assured. Not only would the new regime drive carbon and methane emissions radically down in the U.S., but a move toward what economists call Pigovian taxes (i.e., penalizing harmful activities) could help us lead the way to worldwide pollution reductions. President Obama's newly minted commitment in China could easily be met without singling out coal. At home, you would have a seat at the table to set the progressivity of exemptions for low-income citizens from the consumption taxes (certainly essential groceries, some housing, and fuel) and rebates for low-income individuals that could approximate or exceed the Earned Income Tax Credit.
Goody Bag For the Right: You don't have to accept a single conclusion of the U.N.'s Intergovernmental Panel on Climate Change for this deal to make sense to you; in terms of efficiency and enhancing investment, limited consumption taxes beat unconstrained income taxes on almost every front and have a weighty conservative pedigree (e.g., President Reagan pushed use taxes). Carbon taxes that are revenue-neutral get good reviews too: See G. Mankiw and A. Laffer. A bonus: The IRS Ring Wraiths will be thrown from their steeds, crippling their ability to harass the free speech of ordinary Americans. Double bonus: Wildcatters may howl, but these taxes will defund and defang Mideast satraps and Russian belligerents faster than any conceivable near-term American policy.
By sending this amendment to the states for ratification, every Senate and House member in these debates would be going big, setting before statehouses the chance to deliberate climate change and the abolition of the IRS at the same time.
We wonder how that will go.
Mark Mackie is former chief counsel for the U.S. Senate Committee on Rules and Administration and practices law in the Dallas/Fort Worth area. John Campbell is also a former congressional staffer and was a deputy undersecretary of agriculture for George H.W. Bush; he is now an investment banker for agricultural concerns in Omaha, Neb.