The 1986 tax reform eliminated tons of loopholes for special (ie:moneyed) interests, there was no increase in revenue however, because tax rates were then cut across the board, but the general structure remained progressive, with the wealthy being bearing a greater burden than the middle class and poor.So what is Bush up to?
Two years ago tax lobbyists came up with a strategy called Five Easy Pieces which would do five things:
2. elimine taxes on capital gains and dividends
3. allow more generous treatment of business investment
4. do away with the estate tax
5. establish tax-free personal savings accounts.
The three major Bush tax cuts to date have achieved the first four pieces, partially or completely.
These steps, taken together, would indeed radically transform the tax code by rendering virtually all investment income tax-free. With capital virtually exempt from taxation, the burden of supporting the federal government would fall almost entirely on labor. It would amount to a reversal of the principles of progressive taxation that have held sway for the last century. And it has very little to do with what most people mean by "tax reform."
But what's up with these changes, where are they leading?
Most of us probably remember the Senate race in South Carolina last year between Inez Tennenbaum, and Jim DeMint, where for a few hopeful weeks she was crushing him on the national sales tax issue. Well, this goal is not going away. So, how is a consumption tax generally supposed to work?
That may sound unfair. And, to some extent, it is. But the unfairness, in a way, is exactly the reason economists like it. Taxes impose the least drag on the economy when they do as little as possible to change people's behavior. One way to design an efficient tax is to concentrate on taxing things that people can't, or are reluctant, to change. This can be unjust.
It penalizes people who have saved money in the past ...behavior that can't be changed (in this case, because it has already happened). As Brookings Institution economists William Gale and Peter Orszag wrote in a recent Tax Notes paper, "A key finding in academic analysis is that almost all of the economic benefit from moving to a consumption tax derives from the one-time tax it places on existing assets."
The one-time tax on existing assets is not only the most economically efficient part of a consumption tax, it is also the one part that most hurts the wealthy. (The underlying principle here being the well-known fact that wealthy people have more money than poor people.)
So since Bush's "reform" plan would shift taxes from investment/capital savings to consumption, rather than from wages to consumption this not really consumption tax, it's simply a double tax on wages on the front and, and on the back end, for working people. And rather than broadening the base of income subject to taxation, it narrows it, and does so regressively. The only possible outcomes are still higher taxes on wages, more and more deficit spending or... or what? Dramatic cuts in spending?
We are all familiar with Grover Norquists famous quote about shrinking the government to the size where it can be "drowned in a bathtub". But why the shifting of the burden to working people? As Stirling Newberry described earlier today, we also know that Bush will be "making it harder for self-employed people to avoid payroll taxes", "expanding the federal tax on telephone service", "changing the laws that exempt from payroll taxes for Social Security and Medicare a variety of fringe benefits, including employer-paid health insurance and child care assistance", and from the comments: "eliminating the property tax deduction". What do these policies all have in common?
They are all designed to increase tax friction on everyday people
It's rather sick, really. Under normal conditions where the tax-policy is set up to, at least in some respect, share the burden, increase growth, create jobs, etc. etc., only the fringe is motivated to get activist against taxes. I can only assume that by making the burden of taxes worse on your average person, or small-business they hope to incite a more general tax-revolt; the kind that Norquist and his kind salivate over. They can only do this by really making people feel it, and by doing so they are promoting policies that are bad for growth, bad for distribution of wealth--just bad period! Anyway, as bad is all this sounds, I really don't see how it can work. It seems like a classic example of hubris getting in the way of reality.
So what about real tax-reform?
What would a forward looking, progressive, Democratic tax-reform plan look like? I am still putting my thoughts together on this one, and hope to write a diary about it soon. But in the meantime...