What Might Fundamental Tax Reform Look Like?

 

All four of the major presidential candidates have tax plans. Hillary Clinton would make small tweaks in our current tax system.  Bernie Sanders would raise current taxes substantially.  Both Donald Trump and Ted Cruz would both radically reduce the size of the federal income tax but would also greatly add to the national debt over the next ten years.
I have been trying to make the case on this blog that fundamental tax reform is the best thing we can do to get the economy growing faster in order to create more and better paying jobs.  I have also discussed a specific way to accomplish fundamental reform, namely the so-called Competitive Tax Plan proposed by the tax law expert, Michael Graetz.  It is a progressive consumption tax, a so-called Value Added Tax.
Capture2As reviewed in yesterday’s Wall Street Journal by Reihan Salam, the editor of the National Review, the Graetz Plan has these features:

  • A broad-based VAT of about 14% on goods and services.
  • Families earning less than $100,000 per year are exempt from the income tax. The tax rate would be 15% for incomes between $100,000 and $250,000 and 25% above this level.
  • The payroll tax (supporting Social Security and Medicare) would be greatly reduced for all workers earning less than $40,000 per year.
  • The corporate tax rate would be lowered to 15%, making it among the lowest in the world.
  • The Graetz Plan is revenue neutral as verified by the Tax Policy Center.

Think of the incredible advantages of such a tax plan. Of the expected 145 million tax returns for this year, 120 million would no longer be necessary.  Extravagant deductions such as for mortgage interest would have much less political support. The low corporate tax rate would bring jobs back to the U.S. instead of sending them overseas.  The rampant cronyism involved in tax breaks being handed out by Congress would be greatly reduced.
What is not to like about the Graetz Plan?

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16 thoughts on “What Might Fundamental Tax Reform Look Like?

  1. Jack,
    The plan you identify appears reasonable. But what about dealing with the infrastructure? Should we not also be finding more jobs for the unskilled and those who work only part-time? I think both issues would have public support from both the left and the right.
    Doug

    • One of the main benefits of fundamental tax reform like this is to make the economy grow faster. Faster economic growth will by itself create more jobs and better paying jobs.

  2. That be all right but lets say raising minimum wage this would cause alot place like walmart to have mor self checkout one employee wathing have seen to be up to 10 registers that say lose of nine jobs to me or waiting staff gets paid bellow min. Bht also pocket 3/4 of there tips in unclameid income cant raise there wage much it cause food price to incress to make up what resturants would have to pay witch cause a large amount of small ones to close means meny lost jobs all cash tips should be wrote on the recipet like card purchases and added to the wait staffs checks document by the company not to there pocket at work days end so those are claimed income it would bring a tone of money into the governent to lower taxes for all middle class and below instead of raiseing and new tax made making it easyier to start profitable smaller businesses creating more jobs lot of small businesses is sole persons income and taxed by estimate example drywaller first year solo made 25 thousand lived off it feed family all year at that years end uncle sam wants im to pay a lump some of say 6500 well that sucks cuz he dont have 6500 layin around at grasp went to feed his family so now he basic has to work the next quarter for free to lay that + that quarters estimant now how can they eat then at that ends year made 4 grand more than the previous year now same wants a nother lump sum of 2800 and dont reseve the low income atvantages as employed waiters not claiming 3/4 of there earn income sitting on welfare foodstamps and low income rent all paid by the taxes of the smaller strugglin business i bet them waiting staff thats wanting the raise be in a total shock when then cash claimed tips and put them in a higher tax bracket by just a 25 cents and cause them to actually bring home less before they got there raise and claimed tips i was pist at a 35 cent raise at a job because of that reason and want the raise tookin away cuz i would bring home more and pay less in taxes and returnee more

      • My point was that they should be stoping them from be able to pocket those cash tips i get 1099 every year and always end up paying out ly ass in taxes even after makin quaterly payments and they want raises and dont claim 3/4 of there income wich is bull as they end up getting government aid and crap that my taxes paid for and there not paying theres

  3. I think you’re missing the point. If we replace the income tax by a consumption tax, then no income needs to be declared, either wages or tips. Income will no longer be taxed at all!

    • A consumption tax is my first choice if it is set up to be progressive, e.g. with some kind of a floor to protect low-income people.
      A flat tax is my last choice because it is not progressive.

  4. Jack Heidel, the Prebate is what makes the Fair Tax progressive. You said a flat tax is not progressive. From the standpoint of a marginal rate, why not have a flat marginal rate and a progressive effective rate? Here is an example: Let’s say the top marginal tax rate for a millionaire is 30%, with a cap on deductions. Factoring in the deductions, their effective rate is only 15%. And for people who make $120, 000.00 or less, they pay nothing in federal income taxes, either looking at it from a marginal tax rate or the effective tax rate.

    • $120,000 is probably too high for a floor for a flat tax. Only 20% or so of taxpayers make more than this. This would mean that only the top 20% pay all of the taxes. I think we need a broader base than this.

  5. Jack Heidel, ordinarily and under certain circumstances, I would agree with you. I know the government needs money to function, however, who can spend your money better-you or the government?

    • We badly need to control spending at the national level but it will be very difficult to eliminate whole programs. We live in a large, complex society and we will inevitably need a large national government to provide the services most people want.

  6. Jack Heidel, based on your response, you make it sound that my idea seems good in theory but not reality. What about a 2 tiered flat tax, 15% on incomes of $55, 000.00 for single filers and 25% for married couples filing jointly? Some deductions would be kept, mainly for business purchases and charitable contributions. Business purchases would have some deductibility, however, the deductibility of business purchases would be limited to 15% of their profits so people cannot use businesses as a means of buying things completely tax-free.

    • This sounds too contrived. One rate for single filers and a separate rate for married couples? I am not a tax expert. I can’t foresee all of the ends and outs of every specific proposal.
      I would probably keep roughly four different tax rates in order to assure progressivity in any tax plan.
      I also think that any new tax plan needs to be revenue neutral. We simply cannot afford to make our annual deficits any larger than they already are.

  7. What is so bad about one tax rate for single filers and one that is higher for married couples that jointly file taxes? Now, if you taxed $55, 000.00 at 15%, the taxable dollar amount is $8, 250.00. Now, if you earned $110, 000.00 and filed taxes jointly, at a rate of 25%, the taxable dollar amount is $27, 500.00. Actually, my plan has a degree of progressivity. The lower tax rate for single filers, the higher rate for married couples that file jointly.

    • You’re punishing marriage which should not be done. Your plan would have married people paying twice the rate of the unmarried. If a married couple divorced and continued to live together, their tax rate would be cut in half.

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