Academic journal article
By Gale, William G.
Yale Journal on Regulation , Vol. 15, No. 2
The Decline (and Fall?) of the Income Tax, Micheal Graetz. New York: W.W. Norton, 1997. Pp. 323. $27.50.
William G. Gale^
Although tax policy debates are a never-ending source of amusement and frustration, recent years have witnessed a shift in the tenor of such discussions. In particular, serious consideration is now given to proposals that would not just modify the existing tax system, but rather completely replace major components of the federal tax system with new consumption-based taxes.1 Most such proposals would eliminate federal individual and corporate income taxes and the federal estate tax and establish in their place a new national retail sales tax,2 also called value-added tax (VAT),3 "flat tax,"4 or "USA" tax.5
Clearly, the income tax as we know it suffers from significant problems. Broadly speaking, the extant system is thought to be overly complex, unfair, and not conducive to good economic performance.6 These concerns have existed for a long time, however, and have plausibly declined in import over the last two decades.7 Thus, while these concerns are very real, the recent political fervor over fundamental reform may be attributed, at least in part, to factors other than problems with the income tax. It is possible, of course, that such critiques are motivated by an effort to shrink government by attacking its revenue source, though the effort to reduce government by shifting to simpler, more efficient tax systems could actually backfire.8 At least some of the focus is purely political; bashing the tax system (and the IRS) is often good politics regardless of the actual merit of the proposed reforms.9
As a result, no current (or even recent) policy debate contains rhetoric that is so overblown and so weakly related to reality as that of tax reform. Tax reform proponents often tell us that a new tax system would be incredibly simple,10 would eliminate lobbyists and tax politics,11 would be fair,12 and would generate massive economic growth.13 Despite these gross oversimplifications by advocates, comprehensive tax reform is a complex and subtle subject.
The purpose of Michael Graetz's book, The Decline (and Fall?) of the Income Tax,14 is to tackle this subject head on. The majority of Graetz's book is a careful and nuanced diagnosis of the problem. Graetz examines the strengths and weaknesses of the existing tax system, linking them to the history and politics of tax policy. This is no small or unimportant task: Understanding the claims and mistakes of the past as well as the political constraints placed on tax policy is a requisite prelude to intelligent tax reform.
Graetz also suggests his own reform. Specifically, he proposes to implement a national, broad-based VAT similar to European VAT taxes. Individual income tax would be substantially revised to completely exempt low- and middle-income households and to tax high-income households at a relatively low, flat rate. The corporate tax rate would be cut in half.
It would be a mistake, however, to consider Graetz's book simply as a platform for advocating this proposal. The proposal is made almost sheepishly; in fact, it is first mentioned on page 262 and only four or five pages are devoted to supporting explanations and details. Thus, while the proposal itself deserves serious consideration, one should not judge The Decline solely on whether one agrees with the ultimate tax proposal. Graetz's diagnosis of the income tax, his analysis of the history and politics of taxation, and his humorous (and insightful) anecdotes are well worth the price of admission.
The structure of the book is straightforward. The introductory chapter lays out the problem succinctly: Twenty-five years ago. the income tax was considered the most fair federal tax, but by the end of the 1970s, it was considered the least fair and has remained relatively unpopular.15 Graetz asks: What happened to cause this dramatic shift? …