Review of 'The Benefit and the Burden: Tax Reform — Why We Need It and What It Will Take'

Article Highlights

  • Bruce Bartlett's new book offers a highly readable overview of the federal tax system and key tax policy issues.

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  • A key strength of Bruce Bartlett’s new book is that it covers a lot of ground and avoids getting bogged down in details.

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  • Bruce Bartlett succeeds in conveying important economic concepts in an accessible and jargon-free manner.

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The Benefit and the Burden: Tax Reform—Why We Need It and What It Will Take. By Bruce Bartlett. New York and London: Simon and Schuster, 2012. Pp. xiii, 271. $26.00. ISBN 978-1-4516-4619-1. JEL 2012-0445

Bruce Bartlett's new book offers a highly readable overview of the federal tax system and key tax policy issues. While experts will already be familiar with most of the material in the book, readers with less background will be able to obtain helpful guidance on many aspects of the current tax system and reform proposals. Unfortunately, those readers will need to proceed with caution,as the book contains a significant number of factual and economic errors.

A key strength of the book is that Bartlett covers a lot of ground and avoids getting bogged down in intricate details. He summarizes the history of the federal tax system, describes the tax systems of other industrialized countries, and explains the tax legislative process. He devotes a short chapter to each of several major federal income tax preferences, explaining the likely effects of each provision and sketching possible alternatives to current law. He also discusses the arguments surrounding the appropriate degree of progressivity, the value added tax (VAT), and the 2001 and 2003 tax cuts.

In addition, at several places in the book, Bartlett succeeds in conveying important economic concepts in an accessible and jargon-free manner. He provides an exceptionally clear discussion of substitution and income effects, including an explanation of why the income effect roughly washes out for income tax increases that are used to finance increased transfer payments. He also offers a good explanation of how the possible crowding-out effects of budget deficits impact an open economy, carefully distinguishing the effects on output from the effects on income, and ably discusses the double taxation of corporate income. He also reexamines the evidence on whether VATs are money machines that fuel the growth of government spending, drawing an interesting empirical distinction between VATs adopted during the 1970s and those adopted later.

In keeping with his focus on the big picture, Bartlett outlines his preferred general approach to tax reform rather than detailing a specific plan. In line with his previous writings, he calls for a revenue-raising reform that includes both income tax base broadening and a VAT. He is also clear about what he is against. He reiterates his staunch opposition to the FairTax plan, which would replace most of the federal tax system witha retail sales tax, and calls for the replacemen tof the 2001 and 2003 tax cuts by "alternative tax cuts and reforms" (222). On a more noncommittal note, he discusses a variety of other proposals, such as Nordic-style dual income taxation, annual wealth taxation, taxation of the market value of corporations, a federal tax amnesty, and territorial corporate taxation, without taking a firm position for or against.

On many of the major issues that he discusses, Bartlett is in line with current economic thinking. Economists across the ideological spectrum will cheer his rebuttal of the myth that individual income tax cuts from current levels raise revenue, a fallacy that remains surprisingly and disturbingly widespread in the popular and political debate. Most tax economists concur with his rejection of the FairTax plan. In view of the dire budgetary projections and the public opposition to deep entitlement cuts, the majority of economists are likely to agree with Bartlett's argument that revenue increases will ultimately be needed to address the fiscal imbalance. Many, though not all, economists share his view that the federal tax system should shift towards consumption taxation to some extent as it seeks to raise more revenue. And, Bartlett is surely right that sweeping plans to reform the tax system and reduce the deficit will require bipartisan agreement, which is more likely to be achieved under divided government.

Regrettably, the book suffers from a number of factual and economic inaccuracies, some more serious than others. On a minor note, Bartlett obviously meant to say that the average tax rate is equal to taxes divided by income rather than income divided by taxes. His claim that government debt tends to spiral out of control once it reaches 100 percent of annual GDP rests on a mathematical confusion. Similarly, his assertion that the revenue impact of an "entire package" that combines rate cuts and base broadening depends on the order in which the rate cuts and the base broadening are stacked in revenue estimation (40) is also a mathematical mistake. His conclusion that the Census Bureau's use of before-tax income to measure inequality causes tax progressivity to do a "poor job" of equalizing incomes (63) treats a policy's impact on the measurement of inequality as more important than its impact on actual inequality.

Other errors seem to reflect a lack of fact-checking. Social Security benefits became partly taxable in 1983 rather than 1993, although the extent of that taxation was expanded in 1993. On a related matter, an increase in the retirement age was not the only Social Security benefit cut considered in the 1980s, as a six-month delay in the cost-of-living adjustment was considered and adopted as part of the 1983 reforms. Also, the original expiration date of the 2003 tax cut was December 31, 2008, not December 31, 2010. On a personal note, I was startled to learn that my humble position on the staff of the Council of Economic Advisers, which I began almost two years after the 2001 tax cut was adopted and a mere month before the 2003 tax cut was signed into law, made me one of the"economists behind" those tax cuts (45).

Errors of this kind are overshadowed, though, by Bartlett's grave misstatement of the current terms of the tax reform debate. He claims that plans to move "in the direction of a comprehensive income tax base" are "curiously missing" from current discussions of tax reform (182), when income tax base broadening has actually dominated the tax reform debate since the release of the Simpson-Bowles report in December 2010. He inexplicably complains that the Simpson-Bowles report failed to specify "any actual tax-raising provisions" (181), when its illustrative tax reform proposal, described in National Commission on Fiscal Responsibility and Reform (2010, 31), actually included bold provisions to make employer-provided health insurance partially taxable, convert the mortgage interest and charitable deductions to 12 percent credits, and abolish all other itemized deductions and most other tax preferences. And, it is still more surprising that Bartlett fails to even mention the Bipartisan Policy Center's November 2010 deficit reduction plan. The plan, set forth in Bipartisan Policy Center Deficit Reduction Task Force (2010), includes both base broadening and a VAT, matching Bartlett's own prescription.

Economic errors also occur throughout the book. Although estimates vary, the weight of the econometric evidence does not support a 9 percent annual marginal propensity to consume out of housing wealth; Aron et al. (2012, 413) note that 4 percent is "near the conventional estimatesin the literature." The Pease limitation on itemized deductions has not "substantially eroded" the state and local tax deduction (119) or other itemized deductions because, for most of the affected taxpayers, it has no effect on the marginal tax savings from claiming additional deductions. Also, secondary earners do not face higher marginal tax rates than primary earners under a system of joint filing; each spouse faces the same marginal rate. Bartlett praises the VAT both for having low dead-weight loss and for being easily avoided by taxpayers; the first of these diametrically contradictory statements is more likely to be true. As Bovenberg and du Mooij (1994), Goulder (1995), and others have explained, environmental taxes deliver the double dividend (reducing tax distortions as well as improving the environment) with which Bartlett credits them in only a limited range of circumstances. And, while economists hold a variety of positions about the 2001 and 2003 tax cuts, few would embrace Bartlett's conclusion that the poor macroeconomic performance of the 2000s is sufficient to demonstrate the tax cuts' undesirability.

A final oddity merits a brief mention. Although the book's back cover features quotations from seven prominent individuals, each quotation is simply a general call for tax reform that does not endorse or even mention the book. Bartlett's book provides a useful overview of the tax system and tax policy. Unfortunately, the book's errors, most of which were easily avoidable, prevent it from reaching its full potential.

References

Aron, Janine, John V. Duca, John Muellbauer, Keiko Murata, and Anthony Murphy. 2012. "Credit, Housing Collateral, and Consumption: Evidence from Japan, the U.K., and the U.S." Review of Income and Wealth 58 (3): 397-423.

Bipartisan Policy Center Debt Reduction Task Force. 2010. Restoring America's Future: Reviving the Economy, Cutting Spending and Debt, and Creating a Simple, Pro-Growth Tax System. http://bipartisanpolicy.org/library/report/restoring-americas-future.

Bovenberg, A. Lans, and Ruud A. de Mooij. 1994."Environmental Levies and Distortionary Taxation."American Economic Review 84 (4): 1085-89.

Goulder, Lawrence H. 1995. "Environmental Taxation and the Double Dividend: A Reader's Guide."International Tax and Public Finance 2 (2): 157-83.

National Commission on Fiscal Responsibility and Reform. 2010. The Moment of Truth. http://www.fiscalcommission.gov/news/moment-truth-reportnational-commission-fiscal-responsibility-andreform.

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About the Author

 

Alan D.
Viard
  • Alan D. Viard is a resident scholar at the American Enterprise Institute (AEI), where he studies federal tax and budget policy.

    Prior to joining AEI, Viard was a senior economist at the Federal Reserve Bank of Dallas and an assistant professor of economics at Ohio State University. He has also been a visiting scholar at the US Department of the Treasury's Office of Tax Analysis, a senior economist at the White House's Council of Economic Advisers, and a staff economist at the Joint Committee on Taxation of the US Congress. While at AEI, Viard has also taught public finance at Georgetown University’s Public Policy Institute. Earlier in his career, Viard spent time in Japan as a visiting scholar at Osaka University’s Institute of Social and Economic Research.

    A prolific writer, Viard is a frequent contributor to AEI’s “On the Margin” column in Tax Notes and was nominated for Tax Notes’s 2009 Tax Person of the Year. He has also testified before Congress, and his work has been featured in a wide range of publications, including Room for Debate in The New York Times, TheAtlantic.com, Bloomberg, NPR’s Planet Money, and The Hill. Viard is the coauthor of “Progressive Consumption Taxation: The X Tax Revisited” (2012) and “The Real Tax Burden: Beyond Dollars and Cents” (2011), and the editor of “Tax Policy Lessons from the 2000s” (2009).

    Viard received his Ph.D. in economics from Harvard University and a B.A. in economics from Yale University. He also completed the first year of the J.D. program at the University of Chicago Law School, where he qualified for law review and was awarded the Joseph Henry Beale prize for legal research and writing.
  • Phone: 202-419-5202
    Email: aviard@aei.org
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