Centerfield

All really great ideas. I really like the idea of reforming the estate tax, and the payroll tax reform.

These ideas are all worth considering. But the American challenge is not a shortage of good ideas but electing enough legislators who are open to new ideas and who value debate, collaboration, compromise and deal making.

"Visions come to prepared spirits"

We first need leaders who are ready, willing and able to ponder the optimal course.

We may have lost the battle with global warming not because we didn't have the solutions, because we elect too many small minded and narrow minded representatives.

We need a Centrist PAC to help tip elections, redistricting reform, and open primaries. The left and right wings need adult supervision

I agree Paul, good ideas here. The "fair tax" and other extremist proposals aren't bad in and of themselves, in that they force debate about a topic that needs consideration. But we need a more level headed solution to the problem.

As a business owner, I really like the idea of eliminating payroll taxes. Anyone who owns a small business knows how much of a burden this monthly on employers payroll expenses...let alone employees. It's very regressive. Making it less expensive to hire people is a key to growth thru small businesses.

John, how you would fund Social Security, then? And Medicare?

Pat,

Eliminating the payroll taxes is not a stand alone solution in a vaccum. It's coupled with the idea of replacing it with a progressive consumption tax and is part of 5 prong plan as described in my original post.

Besides, as I said, they have a separate plan for SS. I don't know if this plan is designed to function with the new tax plan.

This gist of it is:

Benefit cuts thru "progressive reductions in PIA factors" and an increase in retirement age.

A mandatory 1.5% contribution into personal retirement accounts coupled with a gradual increase in payroll tax cap to 90% of earnings.

Mandatory retirement accounts up to 3% of earnings funded half by contributions, half by the SS trust fund plus other mods and updates on details for benefits in special cases.

I'm not saying it all passes the smell test but it's what they propose. I didn't read the whole pdf file (9 pages). This is just the basic outline.

Besides Pat,

aside from the alleviated burden on small employers (the largest group of all employers!), this allows the system to be more fair in terms of getting due revenue from illegal immigrants and people who work "off the books" instead of overtaxing the large group of Americans who get their wages thoroughly taxed. I think the result would be a net gain since it's drawing from a much larger group of people.

The key there, of course, is to collect the consumption tax where it is payed and not thru individuals with out SS numbers.

I'd really prefer to see the income tax kept, see it simplified, and see a little bit more equity via seriously limiting the deductions.

I don't think we need a deduction to incentivize every "good" behavior.

I am very leery of a consumption tax for several reasons. To start, let's presume that any reform is basically revenue-nuetral, meaning that the fed collects a very similar amount of dollars under the new plan as under the old. (if we don't presume that, then we are really talking about a vast cultural reform of some sort, not just "fixing" the tax system) So, the first problem is that to collect this similar amount, any consumption tax is going to have to kick in at a pretty low level. That means it will be very hard to make the tax "progressive." If food and clothes were exempted for example, that would take a large pool of spending out of the equation.

Let's not lose sight of the fact that a very "simple" idea for tax can nevertheless be extraordinarily complicated in the application. Do we really want every retailer and seller of services to have to consult the new tax code for every transaction? Are we sure that's going to be better? If this reform passes, be sure to invest in all the companies that will be re-designing tracking databases and application software for businesses.

Further, a consumption tax is likely going to be in peoples faces every day. By comparison, payroll taxes are invisible. Will consumption taxes increase black market economic activity as people use 21st century communications to barter and trade?

And last, how do we make the transition in a way that tries to ensure that everyone's ox gets gored the same way and in the same amount that their ox was gored under the old system? Isn't it inevitable that the change will create some big winners and losers, and that when we start to realize all these we inevitably find ourselves right back on the loophole/remediation/exemption treadmill that got us here in the first place? "Oh wait, exempt this, exempt that, this person or industry is getting killed, give them a rebate, yada,yada, yada. Yada.

IMO, sweeping tax reform is dead in the water. I don't believe that our system as a whole truly wants sweeping reform and the vast number of changes and uncertainty such reform will bring. Tax reform's "constituency", such as it is, consists of the huge body of people who are unhappy about paying taxes. It's one of those issues where politicians fight over who's more strongly in favor of something that no one disagrees about. Almost no one is pro-tax (or anti-education, or pro-crime....) But support for tax reform splinters awfully quickly as various groups support plans that would gore their ox less.

Here's the thing: from day-to-day, both average people and businesses crave relative predictability. We can't just afford to have a period of a year or two of talks leading to a signed bill, followed by a2-5 year shakeout period of getting the new system up and running. That sort of uncertaintly would be intolerable, and on top of that we'd have the extra probelm of big anger at unanticipated problems. This could seriously eff up an economy folks. People would buy gold and $hiT!!

So IMO the reform has to be a remodel that occurs while people keep living in the house. there's no trailer to rent for us to live in while we tear down and re-build from scratch. I just don't see it. I don't see the legs.

BTW John, it's customary to provide at least a link to your source document, and if possible, an excerpt to give readers a taste. See the HTML common tagging at the bottom of the comments section. Use this text, and in the place of "somewebsite.com," put the URL of the link, and in the place of "link text" put some descriptive words. It's not at all hard.

AN INNOVATIVE TAX PLAN FOR THE 21ST CENTURY

[PDF warning]

Brian makes excellent points. I am particularly concerned, in any reform effort, of justifications that we will get more compliance, less "off the book" economic activity, if we just adopt this or that new method. Right now, we see incomes paid in cash under the table because income is what is taxed the most. If we have a consumption tax, mom-and-pop stores may be more able to compete with Walmart by offering a "discount for cash", and New York might become even more ridden with "back of the trunk" sales of jeans, watches, shoes, purses, etc., etc. And what about services? A consumption tax, to really bring in all the money we get now, would have to tax services of all sorts. And that is a HARD area to police and regulate. The transactions are intangible and don't usually take place in public.

Also, as Brian notes, consumption taxes hit hardest on the poor. They are not "flat" but are really regressive. The poor spend a higher percentage of their income on consumption than the rich do... even if you were to miraculously remove food and utilities and medical care and whatever else from the equation. People living paycheck to paycheck would be paying 10% or 20% or whatever of their total income on taxes, while people with more means would pay that 10 to 20% on only maybe half their income. I think a flat tax has merit, maybe, but a regressive tax? No thanks.

My own state of Louisiana relies very heavily on sales taxes. It was a massive, massive battle a few years ago to eliminate the "temporary" (for the past 20 years) sales tax on food and utilities and replace it with modest a modest tax hike on upper incomes. The switch, while good, has had significant compliance hassles for small businesses. Grocery store food is tax-free. But restaurant meals are taxed. Where falls the burrito you nuked in the convenience store on your last road trip? How about the morning cup of coffee you grab down the street?

Brian, I seem to recall that one recent tax reform proposal allowed for, basically, an optional phase-in. Basically, the taxpayer could figure up his taxes under the old and the new system, then decide which one to pay. Obviously, it retained an income-based tax system. I think such an approach really has merit for whatever kind of reform we're able to come up with. I can't find a link to it, though.

The phrase "progressive consumption tax" rang my alert bells. Who bells that cat, and how?

The estate tax proposal simply will not fly. Despite the best push of the GOP, the estate tax will remain in one form or another. The current compromise looks to be an exemption base of $3 to $5 mill hooked to inflation, with a tax rate pegged to the capital gains rate. The dirty little secret of the touted "repeal of the death tax" is that if you eliminate the estate tax ALL estates, large and small, would become subject to capital gains on date of death as legal title shifted. Bookkeeping nightmare, and reaching to all levels.

OK, that link doesn't seem to work although it's the correct one, but you can go here and then click on the "New America Tax Reform Plan" under Featured Publications. If it hasn't crashed out as well.

Quick take: Short on details, long on hidden assumptions and class rhetoric, and no actual empirical analysis at all. If it all sounds real familiar, that may be because the NAF is pretty much an offshoot of the DLC. They seem to have been listening a bit too much to Lakoff, as the "About Us" page for the NAF Fiscal Policy group is all about "Reframing the Debate." Uh huh. How about we just deal with the reality instead? That'd be a nice reframing.

(You'd almost think I was a cynic...)

Brian,

I understand your concerns and, honestly I agree with many of them. I threw this proposal from the NAF out there for us to kick aound and that we have. The progressive consumption tax as they propose it is actually figured at the individual level...not at the retail level.

They simply say that one's income is matched against one's annual savings and a consumption tax is figured against that....that actually does little to tackle the black market problem. The idea of channeling payment thru the retailer was borrowed from Neil Booortz's book about eliminating the IRS and going with a straight consumption tax.

I did actually list the link in my original post and summed up the major points directly from what they wrote. I never really learned how to make links the way Tully tried to. I'll try it next time.

Pat,

I understand that consumption taxes hit hardest on the poor and for that reason, I'm generally against it. But the idea of a progressive tax based on how much one spends seemed interesting to me. Ofcourse, as Tully said, their proposal is short on details and leaves a lot open to assumptions and hard questionning...something I did mention in my original post. I'm open to other ideas. But I do find the NAF proposals interesting and worthy of being a starting point for discussion. I've read the proposal from the Center for American
Progress and also found that fair and doable and pro-growth for more people. I understand the progamatic side of any policy and though less innovative, their plan definitely passes the "in practice" test.

And Tully,

I didn't get the impression that they were a spin off of the DLC. They seemed very independent in their plans and proposals.

I didn't get the impression that they were a spin off of the DLC. They seemed very independent in their plans and proposals.

You kinda have to know the player list there. The staff at NAF is overwhelmingly former aides and advisers and staffers to Congressional Dems, with a good bit of crossover with the DLC and their associated "think tank," the Progressive Policy Institute.

For example, the author of the tax plan brief is Maya MacGuineas. MacGuineas is co-founder of Centrists.org, along with Jeff Lemieux from the PPI. Centrists.org is itself a "masked" offshoot of the DLC. The NAF also does some bipartisan "outreach," and has connections to the McCain and Leiberman camps.

There's nothing wrong with that, and I have no beef with it. Washington is built on networking, and in today's overly partisanized atmosphere such buffers are useful tools for getting past the stone walls of opposition to accomplish some dialogue. NAF and Centrists.org are part of an effort of reaching towards the middle from the DLC-oriented Dems, and that's much needed. But I do like to know the players, sans masks. The afore-named are all DLC/Dem orgs wearing masks.

That doesn't mean they represent the current leadership of the Democratic Party, by any means. Mor like the old Clinton camp. Their couterparts across the aisle would be the Mainstreet Republicans, and so on.

They still gotta come up with realistic and verifiable numbers to make it more than rhetoric.

thanks for info, Tully. I'm not really good with "behind the scenes" names in most cases. I recognize certain people but nobody at NAF really jumped out at me when I read the list.

How, exactly, would a "progressive consumption tax" be actually be implemented? Just for openers:
- how do you know if a particular purchase in my first dollar spent or my millionth? (OK, to be more realistic, how about my thousandth or my ten-thousandth?)
- for that matter, how do you avoid having the whole thing massively loaded to the end of the year? Until then, you have no accurate idea how mich I am going to spend during the year.

Getting rid of the cap on Social Security contributions is about as far as we could go to make labor taxes less regressive and still be realistic.

wj, as I understand it, the consumption tax advocated is not a VAT or sales tax, imposed at the point of purchase. Rather, you fill out a tax return each year pretty much as now, except that instead of deductions for certain expenditures, you deduct your savings, instead. The more you sock away, the more frugally you live, the less taxes you pay.

Pat,

"you fill out a tax return each year pretty much as now, except that instead of deductions for certain expenditures, you deduct your savings, instead. The more you sock away, the more frugally you live, the less taxes you pay."

Yep. That's about how I understood it. Seems simple enough. I don't know if any standard deductions would still apply or how much this tax is.

So I suppose if someone makes $50,000 and pays his federal income tax out of his check as usual and then if he has 15,000 saved from that income between IRA, regular savings etc., he pays a percentage of the difference in consumption tax. That percentage would based on a progressive spending scale.

Again, details are needed. Do deductions for mortagage and other such tax deductible items apply?

I'll tell ya, it may make people a little cheap come Xmas time!

Which would bring me around to the fallacy of a "progressive" consumption tax as vaguely detailed in the article. By nature, who saves the most, and who is forced to consume most of their resources in day-to-day living? Uh huh.

Yeah, it could boost the savings rate, but it wouldn't be the low-income brackets who got the benefits. Wouldn't do them much good at all. "Progressive" in this case is being used as a buzz-word. Which is pretty much my second objection to the proposal, the first being the complete lack of any base revenue analysis.

To wit, the rhetoric is "progressive" but that's all it is--rhetoric. No matching to reality, some class-warfare arguments thrown in, but at first glance the only places there are any specifics it looks to be bringing MORE taxation down on the lower and middle income brackets, while demonizing the upper brackets.

Take the "inheritance tax" proposal. Looks reasonable at first take--but the devil is in the details, and it's only "progressive" by being linked to current income. In application it would be enormously more complicated than the current law, leading to ever more Byzantine avoidance schemes with massive avoidance costs, and produce little added revenue. Where's the "efficiency" in that? AND it's loaded with BS knocks at "trust-funders" that indicate the author either doesn't understand the taxation of trust funds, or the after-tax money that goes into them, or the taxes that apply to money coming out of them.

Or the whining about current caps on SS. Since no one can collect benefits on any income higher than the caps, any dollar taxed past the caps is out-and-out income taxation. I don't object to that in theory, but why not just make that portion actual income tax? If we do nothing, it will be anyway as the system goes into deficit. The proposal to boost the pay-in caps witout boosting the pay-out caps is ntohign more than a way to make the SS program numbers look better, while not really doing anything but raising income taxes. Not buying that one.

The more you sock away, the more frugally you live, the less taxes you pay.

So the more you have left, the less they take. And the less you have left, the MORE they take.

What could be sillier? I wonder where things like buying stocks and shares of mutual funds go...I'm presuming that investing counts as savings. This is IMO quite a stupid road to go down, even if it has spome surface appeal at a glance. Are we going to tax people based on whether the things they purchase appreciate or depreciate in value?

We live in a capitalist society, and sustaining it requires consumption. I think it's very suspect to in essence connect tax policy to the value judgement that Scrooge down the street who works in town, wears his 25 year old sweater and drives a 30 year old Ford Escort is of intrinsically higher character than a traveling salesman wearing a new sweater who just bought a new minivan because his wife is pregnant with a 2nd child.

And Pat, I'm not riffing at your expense, just using your description as an opportunity to expound. You've acknowledged that consumption taxes have substantial warts.

I wasn't supporting it in the slightest way, Brian. Just describing. I tend toward the flat tax, myself.

Pat,

While I think the Flat Tax or some deritive thereof is worthy of consideration, it also runs into the same "fairness" problem in the eyes of many and is seen as "regressive".

Though I'd more than willing to see it investigated and illustrated with real data, I fear it would suffer the same fate of as the consumption tax.

The reason I'd like to see a Flat Tax illustrated would be to see how it affects the economy...namely the costs of production and therefore also wages and consumption.

If it spurs growth and leads to better prices and competitiveness for American Products...not to mention a better quality of life with spending power...I'd be all for it. On the other hand, if it's every bad regressive thing that opponnents make it out to be and can be shown to do so, I'd be against it.

I'm optimistic but cautiously.

ALSO,

and it may be worthy of discussion on it's own thread but the Center for American Progress Tax Plan goes as follows:

1. Equal taxation rates for all forms of income be they dividends, wages or whatever.

2. Remove employee's half of SS payroll tax (a 6.2% savings on wages) and collect it on wages above 90,000.

3. Alter the earned icome tax credit rules to apply to married couples and not just single parents. Also, reduce the requirement income for this credit.

4. Simplify the tax code with 3 brackets (on all income) 0-25000 (15%), 25000-120000 (25%) and above 120000 (39.6%). Raise the standard deduction to 10000 for married people and index for inflation.

5.Close Corporate and individual loopholes that shelter offshore income and remove incentives to do so.

6.Eliminate the need for alternative minimim tax (AMT)

7. Offer 25% refundable credit for retirement savings allow for incomes under 1 million to deduct 50% of long held assets from capital gains tax.

8. Restore fiscal dicipline...ofcourse!

See PDF summary at the bottom of this page for more info.

Sounds pretty good. Not very "millionaire or billionaire friendly" but it would leave the bulk of americans earning a lot more money. Whether that stark trade off is better for the economy, I do not know.

Does a long term approach like this ultimately stiffle growth and quality of life or hurt it? I'm sure the folks at CATO would have a strong rebuttal.

A lot of that depends on the exemptions and deductions allowed, John. We could define, for example, the poverty line wages as the minimum below which one pays no tax, and then have everybody pay a flat rate on all income above that amount. That's not particularly regressive. The government is merely taxing all income above the minimum deemed necessary to live in this country. On the other hand, if we say 10% on all income, regardless, then that does hit the poor pretty hard, because it's a lot easier to fork over $1,000 out of $10,000 then it is to fork over $100 out of $1,000. Same percentage, vastly different effects from doing without.

To offer the first critique of the Center for AMerican Progress's plan that I posted, I would say this:

I wonder about the averse effects on companies payroll expenses, particularly in urban areas on taxing above 90,000. That may not do a thing to people like me who hire low wage blue collar workers but to companies like Google and Microsoft and others who have significant payrolls above 90 grand, if I could feel bad for them for just a moment, that would put a noticeable increase on their payroll taxes and may (MAY) hurt upward wages in thriving companies.

Ofcourse, for the very large majority of small businesses, it won't do a thing.

The other complaint I have is taxing people from 0 to 25000 at 15%. Sure, it's a windfall of savings for middle to upper middle income earners but, unless I'm wrong, it seems like it would hurt the poor since I believe there's no income tax under 10,000(?).

It's very "progressive" indeed, punishing the succesful like never before.

EXAMPLE: Remove employee's half of SS payroll tax (a 6.2% savings on wages) and collect it on wages above 90,000.

Translation: Eliminate the cap entirely, and apply a flat rate income tax surcharge on all income over 90K to cover the shortfall, thus boosting the top effective rate by 6.2% to help pay for entitlements. Adding 6.2% to incomes 90K-120K (under three-tier example) would make the real rate 31.2%, for over 120K it would be 45.8%. This income tax surcharge would not be returned to the people paying it in (top benefit payout would still be based on the 90K level) but would be used to susbidize entitlement payouts to people whose "contributions" to SS were insufficient to cover their benefits. Employers cheer at losing a burden of 6.2% of payroll.

Since regular income wouldn't be enough to cover that revenue hole, yep, better make ALL income taxable at those nice high rates. Capital gains at 46%? Hey, that'll keep the economy humming....

EXAMPLE: Eliminate the need for alternative minimim tax (AMT).

Sure would. Since you have to pay the higher of the two between regular income tax and the AMT, boost regular income tax rates high enough, count absolutely everything as regular income, and the AMT becomes completely non-operational. Folks would be begging to go back to it.

Oops, missed that the first says "employees" rather than "employers." Still doesn't alter the revenue tax effect. In fact, makes it read MORE like an "eat the rich" tax plan.

All your complaints are valid and I agree.

Ofcourse, the gainfully earning 2 income married couple bringing in about 85,000 to 105000 with their nice 200,000 to 250,000 home in middle america would be thrilled. This group up to the mid-100's living above average expense areas gets hammered under current rules for the most part. My brother and his wife (both teachers here in PA) fit this descrition to T.

But yes, for those people and families earning 200-500,000 per year, particularly in large metros where these salaries are more common, it can get a bit heavy.

Someone like Cheney, Bush or Heinz Kerry would get hammered (but still be very rich).

Which would bring us to the core question, John. If WE were going to re-write the tax code from A to Z, what would we do?

Step 1: Set standards of "fairness" (subjective) and revenue targets (objective).

Step 2: Start arguing.

You forgot the 3rd step that all politicians are queezy about seriously tackling:

SPENDING

I'm all for a better tax code. I would personally implement a variation of the flat tax with slight progressivity and a flat capital gains tax around 12-14%. Another income tax vatiation that I like from CATO is a 2 tier system where they suggest two rates in which "nearly all families...pay tax at a low 15 percent rate. A 27 percent rate would kick in for earnings above $90,000 (single) and $180,000 (married)." I'd like to see this pursued with data examples. They have a 44 page pdf file on it.

Of course, I would suspect that this plan, as I suggest it, would NOT be revenue neutral. But that's fine.

They need to really cut spending to match revenue cuts. I would assume a small proportional increase in revenue would accompany the cuts...meaning a 10% cut in total taxes would yield a little less than 10% decrease in revenue since there's be growth and less evasion.

The problem I've found with GOP proposals for cuts in spending in recent years (and always) is that they always go after social assistance and pretty much ignore everything else. Looking at the size of the defense budget, both direct and indirect under other agencies like the D.o. Energy, I get angry that it never gets any skeptical reviews for cuts. I will never believe that the hundreds and hundreds of billions of dollars are totally justified and beyond reproach.
NEVER. Corporate welfare is another.

Besides the fear in pols of being seen as weakening America by cutting defense spending...not to mention the fear of backlash from the military communities that blanket the country, I sense a concerted effort by pols to subsidize part of the economy (military industrial complex) (and boost trade thru military products) that would otherwise have to do something else. It really bothers me.

They need to really cut spending to match revenue cuts.

Others would say they really need to boost revenue to match spending.

See, we're arguing already! :-D

Maybe I should have put #2 first....