A User's Guide to Proposals to Replace the U.S. Tax System and Strangle Fiscal Policy
Buchanan, Neil H., Journal of Economic Issues
Taxes evoke strong and contradictory emotions. The desire to keep as much money as possible conflicts with the sense that we should contribute to the good of society. Respect for privacy collides with the need to ensure that others are paying their fair share. Dislike of complexity clashes with the desire to be responsive to unique situations. Given this fundamental ambivalence, it is not surprising that the tax system is a constant target of revision.
As the 1998 midterm elections fade into memory and the presidential election looms in 2000, tax "reform" will again be the order of the day. Anti-tax rhetoric such as "confiscatory tax rates," "punishing success," and "a penalty on the creation of wealth," as well as the all-purpose reactionary insult "social engineering," will fill the airwaves.
While many tax proposals are offered piecemeal, such as reducing or eliminating specific types of levies, the recent trend in the United States (at least among presidential aspirants) has been to think big and to propose The Perfect Tax System. There are no new proposals, of course. Instead, rewrapped packages arrive containing the same old proposals to shift taxation away from corporations and wealthy individuals and toward everyone else.(1) As an expression of the belief that these new systems really are perfect, many proposals are also spiked with constitutional provisions to make future changes in the tax system more difficult.
As a matter of political marketing, promoters stress each proposal's greater simplicity relative to the current system.(2) Most are also claimed to increase the rate of national saving. Both of these effects (simplicity and saving-friendliness) will supposedly lead to greater investment, higher levels of long-term economic growth, higher standards of living, and greater international competitiveness. These claims are, of course, specious. On this, readers of this journal might refer to Buchanan .
This paper provides descriptions of the four prototypes for extreme tax restructuring that have become popular in U.S. policy circles: direct consumption taxes, saving-exempt taxes, labor-income taxes, and simplified income taxes.(3) While some reference to specific proposals offered in Congress over the last several years will be useful, the analysis will generally emphasize concepts over administrative details.
In addition to rebuilding the federal tax system, many proposals would cement the new arrangements with special constitutional and legislative provisions. These proposals - and their interactions with other aspects of the tax code - are the focus of the second section of the paper.
Moving from description to critique, the third section dissects three familiar arguments that underlie all but one of the four proposals. We are told that we are over-taxing capital, that we should eliminate "double-taxation," and that the tax system should be designed so that it does not "distort" the economy. These arguments are, at best, half-truths; and they are more likely dishonest rationalizations for a massive upward redistribution of income. They certainly do not add up even to a minimal case for fundamental tax restructuring.
Outlines of the Major Approaches to Tax Restructuring
As noted above, current discussions of sweeping tax restructuring in the United States generally revolve around four prototypes: direct consumption taxes, saving-exempt taxes, labor-income taxes, and simplified income taxes. The differences among the first three are largely cosmetic but are politically important. Each of the three is designed to encourage saving by taxing consumption exclusively. All four systems will be described in turn below.
Taxes on Consumption
Value-Added Taxes (VATs), common in Europe and elsewhere, are business taxes that are levied at each stage of the production process. Each participant in every production process pays a certain percentage of the difference between the cost of their inputs and the revenue from their outputs. …