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A public policy blog from AEI
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.
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