Economics, Pethokoukis, Taxes and Spending

Some House GOPers want to scrap the US tax code by 2017. Is that a good idea?

Image Credit: republicanconference (Flickr) (CC BY-NC 2.0)

Image Credit: republicanconference (Flickr) (CC BY-NC 2.0)

I am generally skeptical of policy ideas predicated upon “scrapping” some existing system — particularly if it’s been around for awhile and is deeply enmeshed in people’s lives. But some House GOPers want to take the wrecking ball to the US tax code:

Rep. Bob Goodlatte (R-Va.) and dozens of other Republicans proposed legislation on Wednesday that would eliminate the current tax code by the end of 2017, and require a new, simpler code to be installed during that same year.

The Tax Code Termination Act, H.R. 352, is meant to save taxpayers billions of hours that are now spent on complying with a code that Goodlatte said is “impossibly complex.”

His bill would repeal the entire code, except for sections dealing with Social Security and Medicare, by December 2017. It would require Congress to approve a new code by July 2017 that provides tax relief for everyone, promotes growth and job creation, and encourages savings and investment. Goodlatte argues that setting a date certain for the expiry of the current tax code will help prod Congress into creating a new one.

Goodlatte introduced a similar bill in the last Congress, although that bill had 53 co-sponsors, and his new version was introduced with 68 supporters, including one Democrat, Rep. Mike McIntyre (D-N.C.). Goodlatte noted that similar legislation was approved by the House in 1998 and again in 2000.

1. If any Republican is supporting this bill with the idea that some sort of flat tax would be the end result, they should think again. Not only would the political support be hard to find, it would likely mean a tax hike for middle-income Americans versus the current code.

2. Of course, some Democrats might agree to a simpler, flatter tax code with lower rates if it was also accompanied by a value-added tax. Any takers, House GOPers?

3. There are huge and costly transitional issues involved in any major and comprehensive tax overhaul — not to mention plenty of policy uncertainty.

4. Do we really need “tax relief for everyone?” Do we need a tax code that taxes less or, rather, one that taxes differently, taxes in a more efficient fashion and in a way that boosts growth?

5. But if tossing the income tax is your goal, a progressive consumption tax would be a wise replacement, and one that might get bipartisan support. AEI’s Alan Viard:

In the long run, we should ease the tax burden on saving and investment by moving toward some form of consumption taxation. But complete replacement of the income tax with a sales tax or value-added tax is not the way to go – that would unacceptably shift the tax burden to those who are worse off.

A somewhat better approach would replace part, but not all, of the income tax with a value-added tax. Many countries have done this and we may eventually follow suit, but it’s not an ideal approach. Even with a progressive income tax still in place, the value-added tax’s regressivity is problematic. And, giving the government another revenue source may spur spending.

The best approach would completely replace the income tax with a progressive consumption tax. We can do this by adopting a personal expenditure tax, which requires taxpayers to file returns on what they compute their consumer spending by subtracting saving from income. Spending above an exemption amount is taxed at graduated rates, with higher brackets for those with higher spending. Or, we can adopt a Bradford X tax, which splits consumption into two pieces, wages and business cash flow, and taxes them separately. Workers are taxed on wages at graduated rates, above an exemption amount, and businesses are taxed on cash flow at a flat rate, equal to the highest wage tax rate. Under either system, tax credits can be paid in cash to poorer households.

 

11 thoughts on “Some House GOPers want to scrap the US tax code by 2017. Is that a good idea?

  1. Good to know there is at least one defender of the current tax code — which is longer than the Bible, requires 6 billion hours of labor per year to comply with (think of how much lost productivity this entails!), averages at least one change per day (making it impossible for the average person to comprehend), creates a billion dollar industry for tax compliance (paying to comply w/ the law is basically wasted capital), and distorts the market in almost every sector of the economy.

  2. we argue endlessly about what to do about tax policies, spending, etc but how about looking at it from the actual revenues side?

    To wit: right now our current tax policies bring in about 1.5T to pay for entitlements, DOD, National Security and other govt.

    It’s about 1.0T – 1.5T short of expenses.

    how much more in revenues would we need?

    Basically we spend right now about 1.4T for DOD+National Defense, probably about 1.4T for entitlements and perhaps another 400 billion for the rest.

    I’ve yet to see any truly balanced budget that lives on 1.5T in revenues.

    If the discussion about changing tax policies is really about getting more revenue – how much more are we seeking?

    or are we not seeking anything – just a revenue-neutral re-ordering of existing tax policies to result in winners and losers in the shuffle and no new net revenues?

    the one thing one can say about this issue is that there are a cacophony of voices and ideas but they are all over the map in terms of what we’re trying to achieve.

    we SAY it’s about balancing the budget but in reality it does not really seem serious because there are no realistic scenarios where 1.5T could be cut out of the current budget without cutting in half entitlements as well as cutting in half DOD/National Security OR just getting rid of entitlements all together.

    Like I said – those options are so fantastic and off in the ozone they’re never going to happen.

    But actually getting a realistic cogent proposal to do cuts plus increased revenues is not forthcoming as a compromise approach from the fiscal hawks.

    if we’re not talking about more revenues from tax policy changes, it almost seem to be clouding the actual deficit cutting issues.

    so basically, we are nowhere except for the continual threats to do something to further muck up govt if one side does not get it’s way.

  3. A consumption tax is not regressive unless you posit that income earned will NEVER be consumed. It may be regressive with respect to a snapshot time period, but ultimately income will be taxed when it is consumed.
    This is the fundamental reason older people will resist a shift. You taxed my income heavily while my income>my consumption. Then in retirement when my consumption> my income you want to shift the tax to consumption.

  4. I vote for the simpler code and no loopholes. Everyone pays, no special breaks.

    but a simpler code won’t fix our problem on spending if we cannot agree on how much to spend and how much we need to be taxed to pay for it.

  5. A VAT tax, as cumbersome as that sounds, is the only fair tax for everyone’s skin is in the game, even and especially illegals who are now mooching off millions of people by taking billions of dollars from taxpayers and not paying a dime. Americans that are poor can then get an offset in a new tax form with this new system.

  6. A concept not discussed in this article or in the comments above is perhaps a change in the way we tax corporate (C Corp) income can allow our economy to grow and produce more tax revenue, even at the same or lower rates. I suggest we consider either 1) taxing C Corp income in a similar fashion as an S Corp (but without the income characterizations passed on to the owners of an S Corp), or 2) eliminating taxes on the C Corp entity completely, but then taxing the dividends as regular income to the individual shareholders. In number 2 we would need strick enforcement of the undistributed income provisions to preclude companies from distributing their profits. Alternatively, we could 3) elimate taxes on the C Corp entity completely but then tax dividends and capital gains as regular income. In number 3, the value of the shares would increase as the amount of undistributed profits accumulated. However, in number 3 a problem of excessive tax deferral might cause revenues to be reduced.

    • Edit: In number 2 we would need strick enforcement of the undistributed income provisions to preclude companies from NOT distributing their profits.

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