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Today's diary relates the last two posts I made on my Iowa Center for Fiscal Equity blog.  I write about a few comments in the Washington Post on the VAT as well as the debate over the 47% who don't pay federal income taxes.  See under the fold.

Robert Samuelson writes in today's Post about a VAT, which follows George Will's criticisms of yesterday. Both got it wrong, at least partially.

Samuelson fears that a VAT would hurt young families and that it would have too many loopholes. This would only be true without the inclusion of a transfer to employees with families to help them pay the tax. According to a recent study by the Tax Policy Center of Brookings/Urban, such a subsidy would allow a much broader tax. Indeed, if you make the subsidy broad enough, you could solve the demographic problems in Social Security by encouraging people to have children and pay for such a subsidy by voiding the home mortgage deduction and the property tax deduction. Overall, this would change the distribution of housing provided, but not the amount, as the biggest expense for growing families is a bigger home.

Will fears the opposite, the elderly will pay too much as they spend down their savings. Whether this is true or not depends on how you handle IRA withdrawls. If you leave traditional IRAs untaxed, or count them as income with a much higher floor for taxation (say $75,000 for individuals and $150,000 for joint filers), you will find most of the elderly avoiding any additional taxation. Roth IRA holders would have to be given some form of rebate, but that won't break the budget. Will also says that the income tax should be repealed with a VAT.

Will is wrong. What should happen, however, is that the income tax should have a higher floor, as I described above, so only the truly wealthy pay income taxes (Michael Graetz, a Republican, proposes this, though with a lower floor than I favor and with more deductions). Non-retirement payroll taxes should also be part of the VAT, or better yet merged entirely into an employer-based levy so that these can be hidden from view and increased to cover hospitalization insurance under Medicare, as well as Medicaid for seniors who need catastrophic care.

I find it amusing that in two days, one Post essayist says seniors will be hurt and then the other says the young will be hurt. They are both wrong.

Howard Gleckman, of the Brookings/Urban Tax Policy Center, weighs in on the discussion of the number of Americans who pay no income tax. Give it a look here and check out my comments, which I will repost below:

There are some of us, like myself, Len Burman and Michael Graetz who would decrease the number of people filing even more, with the payment on their wage taxes going on other places. Burman would make filing unnecessary but not invisible by turning low rate income taxes into something more akin to a payroll tax (but with tax benefits paid by the employer). Graetz would eliminate the personal tax for most earners altogether, but would retain payroll taxes, which could be a vehicle for VAT offsets. I would simply shift the burden of both payroll taxes and low rate income taxes to employers (and VAT payers), who would distribute credits and lose their deduction for wage and salary income - leaving only the wealthiest to pay taxes but removing their most favored mortgage interest and property tax credits. Burman's higher 25%tax rate is only 10% over the general 15% rate (I don't recall what he does with the mortgage deduction). Graetz's surtax is higher at 20% to 25%, retains the home mortgage and charitable deductions and reaches lower to the $50K/$100K range. My proposal is for a broader base (only ESOP and charitable deductions - although I could be talked into a state income tax deduction) - including inherited income when cashed out, more progressive rates (from 3% to 20%) and a higher exemption $75K/$150K).

I would love to see you guys do a side by side of Graetz, Burman, Ryan and Bindner as to the distributional and revenue effects. May the best proposal win!

The issue of everyone paying taxes is key to those who support a Flat Tax, who desire totally proportional taxation with everyone paying the same rate. The Fair Tax is a varient of this, even with VAT offsets, since the rate charged prior to offsets is equal to everyone. This view is important to people who believe in equality in process rather than equality of result. Indeed, they believe equality of result rewards sloth and breaks down a sense of community sacrifice. Dick Armey is an extreme believer in this view - and not just because his funders also hold it.

This view is not uncommon in society. It's existence is why I propose a VAT along with a shift of wage taxes from individuals to an expanded business income tax. Making such taxes visible promotes at least some shared sense of sacrfice.

The desire for shared sacrifice also leads to the use of per capita debt statistics - even though such statistics are entirely inappropriate given our tax system. The real liability for the national debt is exactly the same as the liability for the payment of tax. They are one and the same, since the ability of a nation to borrow rests solely on its ability to tax. If anything, the national debt liability should reflect the distribution of wealth, which is much more skewed to the top than either the distribution of income or the distribution of taxation. Since wealth is harder to tax than income (even by an LVT - because of the liquidity problem), what each individual owes is a function of the amount on line 60 of their Form 1040, less the credits on lines 63, 64, 65, 66, 67, 69 and 70. This total, times 9 (which is roughly the ratio of federal income taxes to national debt) gives each individual what they really owe. We ended up owing roughly $5,500. Our share of the debt (aside from taxes owed) is roughly $50,000.

The tax changes I propose would essentially further limit the liability for the debt to the wealthy who pay an income surtax - however I would limit the surtax to debt repayment, interest payments and the payment for overseas deployments. Once such deployments are ended and the debt repaid, the reason for the tax would cease - as would the tax itself.

The other egalitarian feature I wish to emphasize is my proposed expanded child tax credit, which would be an offset to business income taxes and paid to workers as a component of wages. This would replace other family entitlements and is necessary on justice and efficiency grounds because small employers of low wage workers cannot afford to pay a living wage (which for me as a Catholic intellectual is non-negotiable doctrine) if mandated without some kind of tax support. Lacking tax support would either drive small firms into bankruptcy or result in business size exclusions that defeat the purpose of living wage mandates.

Originally posted to Michael Bindner on Mon Apr 19, 2010 at 03:58 PM PDT.

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Comment Preferences

  •  Both are right unless you carve out (0+ / 0-)

    exceptions. I think you overestimate the number of elderly that even have IRA's. With all the Rube Goldberg exceptions the tax professionals need not fear their jobs disappearing. Just tax the hell out of the rich.  They don't deserve it anyway.

    Eat recycled food. It's good for the environment and OK for you.

    by thestructureguy on Mon Apr 19, 2010 at 04:18:15 PM PDT

  •  Not clear (0+ / 0-)

    It sounds like you're saying that employees with families would be getting a big break, which would kind of imply that those without families and those who are not employed by others are going to get screwed. Am I missing something here?

    If wanting the country to succeed is wrong, I don't want to be right.

    by Angela Quattrano on Mon Apr 19, 2010 at 06:00:42 PM PDT

  •  no more screwed (0+ / 0-)

    than they are already, unless they need education - in which case they should be able to go to school and be paid to do so.

  •  I'm trying to decipher this (0+ / 0-)

    Am I summarizing your proposal adequately?

    1. Make the personal income tax have a high floor, several progressive rates with deductions for ESOP, charity and state income tax.
    1. Expand the business tax.
    1. Add a VAT with a "transfer"
    1. Leave SS/Medicare alone.
  •  clarifying - thanks for asking. (0+ / 0-)

    On 1, you are correct.  2 Business income taxincludes the transfer as well as Medicare, HIR and Medicaid or else just single payer.  3.  VAT 4. SS retirement/old age survivors stands alone, but with higher ceiling and uniform employer contribution based on average (not individual) wage - which is not here but in other places.

  •  I'm guessing that the employer-driven VAT (0+ / 0-)

    is supposed to work by accounting for your total income and then providing an amount accordingly?  That would work, simple addendum to the W-4 handles it, though the increased capital outlay from employers with lots of lower wage employees might pose a problem.

    All in all, I think you have a reasonable set of suggestions here.  You've taken the best parts of the Fairtax, chiefly simplification, and "progressive-ized" it.  Well done.

    •  thanks (0+ / 0-)

      The question is, is anyone listening?  I share these ideas with all the right people (fellow VAT advoates Bruce Bartlett, Michael Graetz and Len Burman) and on the Tax Policy Center web page and the LinkedIn VAT discussion.  This proposal has yet to break through, however.  Its frustrating - especially since Democrats are as resistent to new approaches as the GOP.  The Independence Party might be more open to such chances and I have been asked to run for Congress against Frank Wolf on their ballot line, but they are of no help with some of the personal logistics.  It is hard to get a job advocating for a new approach to tax reform that actually settles the debate rather than keeping people pissed off.

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