Tax Reform 2.0
President Obama announced yesterday that he has asked former Federal Reserve Chairman Paul Volcker to head a new tax reform panel that will make recommendations by December 4th. This is great news. The current tax system is a complicated mess and can’t produce the revenues we will need in the coming years. But there is no reason for Volcker to reinvent the wheel. His panel could start by looking at the work of a bipartisan tax reform panel established by President Bush in 2005. I may be biased, since I served as the staff’s chief economist, but I think we designed a pretty good blueprint.
Unfortunately our report went nowhere, even though it received wide bipartisan praise from both policy experts and the press. I’d suggest you read it, except that our website www.taxreformpanel.gov seems to have disappeared. Our panel, chaired by former senator Connie Mack (and vice-chaired by former senator John Breaux), heard from more than 100 witnesses, from Nobel Prize winning economists Milton Friedman and James Heckman to mayors, governors, former Treasury officials, tax practitioners, leading policy experts (including many of my colleagues from TPC) and ordinary taxpayers. Until recently, you could have found the report, powerpoint slides of the testimony by the witnesses, and transcripts of the hearings on the Web. TPC has posted the report, but we don’t have the supporting materials.
But ours was a much broader mandate than the Volcker panel has. We took a broad view of reform, and even looked at introducing a value added tax and replacing the income tax with a retail sales tax. In the end, we proposed two rather dramatic plans to redesign the income tax. We did have constraints, since President Bush limited us to revenue-neutral options that would simplify the code, distribute the tax burden progressively, recognize the importance of homeownership and charity, and promote long-run economic growth and job creation.
Those limitations didn’t make our job easy, but we were less constrained than Volcker apparently will be. President Obama has said that no one making less than $250,000 could pay higher taxes under any new reform. That means ninety-five percent of taxpayers can’t pay additional tax, even if it would result in a more efficient system, decrease inequities, or make their lives much simpler. At a time of monster deficits, that pretty much rules out any sensible reforms.
In addition, he appears to be asking the panel to focus largely on ways to close the tax gap—that is, taxes owed under the current system but not paid. Politicians and the IRS have talked about the $300 billion pot of gold for years, but no one has been willing to make the tough choices and more intrusive measures needed to bridge the gap through tougher compliance, more audits, and more collection of information. Raising serious revenue will inevitably involve some hard choices. Fundamental tax reform may be the only realistic avenue to collect a higher proportion of taxes owed.
The 2005 panel did make some hard choices, but ones that would have provided real benefits. For example, we already addressed one of the key areas identified for reform by the Volcker panel: simplification of family and work credits. We proposed a new family and work credit to replace the cumbersome hodgepodge of work and family subsidies in the code now. We also eliminated the Alternative Minimum Tax and kept rates no higher than they are today. To do that, we eliminated numerous individual and business tax preferences. Among other changes, the mortgage deduction was capped and converted to a credit, employer provided health benefits above a cap were taxed, and the state and local tax deduction were removed along with other itemized deductions. Such tough choices are necessary to produce a stable, fair, and efficient tax system.
President Obama would likely make different choices, but our simplified income tax plan would be a great starting point. In future blogs, I plan to highlight some of the ideas put forward by our panel. I hope Volcker & friends will keep our report in mind. To start, they could turn the website, www.taxreformpanel.gov, back on.
LVT is no different in his respect and its introduction as a replacement for other forms of taxation.Mortgage debts have nothing to do with reduced land values, but simply with bad investments and poor banking.As the effects of the tax reform take hold there will be those whose present tax payments are not sufficient to be fully covered by LVT and in the main these are big corporations.
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I have referred to the report several times in my writings on tax policy and reform. Hopefully the report won't completely disappear.As the effects of the tax reform take hold there will be those whose present tax payments are not sufficient to be fully covered by LVT.
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Michael,
As you are surely aware, to suddenly make a 100% change to the method of tax collection is impossible and so propoals for LVT along with all other kinds of tax reform must be introduced gradually and with care to see who benefits and who gets hurt.
LVT is no different in his respect and its introduction as a replacement for other forms of taxation (to replace the present income tax with what a land-owner would then pay as LVT is not necessarily going to hurt him/her). One could start by basing the tax on perhaps only 5% of the ground-rent and work up on an annual basis of the same amount untill after 10 years there is 50% of the rent being passed to the government instead of to the land owners and monopolists.
As the effects of the tax reform take hold there will be those whose present tax payments are not sufficient to be fully covered by LVT and in the main these are big coporations and land speculators whose land is idle or not being fully used and is waiting for sale after the planning of local developments has occured and the price has jumped up. I don't feel sorry to see them hit!
These speculators are the ones who are hindering the economic recovery becaue in spite of the drop in land prices they are still holding out till times improve. Once their cheap land is returned to the market, there is some hope of the production process taking off due to the lower rents and reduced production costs. Both raised employment figures and cheaper goods will immediately result.
Mortgage debts have nothing to do with reduced land values, but simply with bad investments and poor banking. As LVT is introduced there will be a tendency for the present land prices to drop, so it is necessary to pass leglislation to help the present home owners who are only some of the speculatos, to be able to reduce their occupancy of useful land by its sale and loss but not by its abandonment. Having something back from the land is better for all parties than walking away with nothing.
By gradual change, the numbers of speculators (who are already aware that there are risks) would turn their attention elswhere and leave the land to those who can use it. The reduced production costs and greater demand for cheaper goods plus greater employment opportunities on newly released sites, will benefit so many that the loosers will not be very significant and they may even have to do some honest work instead of waiting around for the money to roll in!
Any links to or comments on the actual Volker Commission? Is everyone in the TPC sending their CV over to Austen?
They did not consider LVT. It might have been the time to, when Values were at their peak (although it was likely too late by then).
It is still not the time. It certainly can't be used as a single tax in today's economy – there is too much to spend money on to reverse the current situation. I could see an LVT if the proceeds were to go to bail out people who have lost land value so that they are under water on their mortgages – however that kind of defeats the purpose of the LVT. Right now, it would only exacerbate the current collapse of the price system.
I'm not sure when a good time to put in an LVT would be. Maybe after the market clears out the bad mortgage debt but before the price starts to go up again.
You would almost have to nationalize the entire banking system first and have the taxpayer consent to permanent mortgage loan losses – however that would likely cause an international currency collapse since to do this you would have to in effect destroy the promise of the full faith and credit of the United States.
Macrocompassion – how would you implement in the current economy? Describe winners and losers and how to/whether to compensate the losers.
Did the tax panel consider all the possibilities for taxation including a tax on natural resources? This tax is particularly for applcation on those resources being held out of use for purposes of speculation in their value. I refer to the proposal for the taxation of land values (by Henry George of 1879). Recent speculation by the land monopolists has been done to the point where the price of real-estate has greatly contributed to the cause of our present economic crisis.
Taxation of land values coud have (and might in future) avoid the inflation of any more land-value bubbles, as well as being the best means capable of putting our macroeconomy back on track by reducing production costs with the cheaper land and lower ground-rents that result. Money can be transferred between different parts of the macroeconomy but unlike creating greater opportunity (due to more available land) it cannot work without “unworking” at the place where it was taken from.
I have also found the Tax Reform Panel's report useful, especially the VAT/Simplifeid Income Tax Option that was layed out but not recommended. Michael Graetz's proposal is also good.
I would have a higher floor for income tax filing than both the Tax Panel and Graetz, with $75K individual and $150K family (the Tax Panel had no floor, while Graetz proposes $50K individual, $100K family). I would also expand the base of the Corporate Income Tax to include all business types and end wage deductibility and have all non-retirement savings payroll taxes (Medicare, Unemployment, Disability, worker Survivors) be merged into that tax. Any personal income tax subsidies, such as the Child Tax Credit, the EITC, the Mortgage Credit, a charitable contributions credit as designated by employees and education/student loan credits would be married into the Business Income Tax as well, with benefits transferred to employees. Many income transfer programs could also be merged with the Child Credit.
Like everyone else who commented, I think the limitation of only increasing taxes on those making over $250,000 is counter-productive. I would drop that by about $100,000 to $150,000. Restoring the old 31% tax bracket seems reasonable and will raise a lot of money.
Lastly, the societal purpose of encouraging home ownership for families with children is clear. It is not clear at all for the wealthy or for families without children. Favoring owned housing versus rental housing is also less clear, so an argument can be made for ending the deduction altogether and rechanneling those tax savings to families with children by beefing up the refundable child tax credit.
Most Tax Reform study projects are intended primarily to provide political cover for the status quo. Even the participants of the 1986 effort were surprised when their efforts gained political traction.
Ms. Atshuler hits the nail on the head: “President Obama has said that no one making less than $250,000 could pay higher taxes under any new reform. That means ninety-five percent of taxpayers can’t pay additional tax, even if it would result in a more efficient system, decrease inequities, or make their lives much simpler. At a time of monster deficits, that pretty much rules out any sensible reforms.”
It's one thing to say that the number of winners has to exceed the number of losers in a reform effort. But saying that there can be no losers at all among the lower 95% of taxpayers completely prevents any structural change. The new committee might as well quit before it starts unless this condition is relaxed.
Hi,
I agree, the Bush Tax Advisory Panel report was good. It laid out the problems well and I think it had bold solutions, such as making the mortgage interest deduction more fair (by cutting it back and removing the home equity debt provision), considering two different types of corporate tax reform, and more.
I too was surprised to find that the URL had gone away. The archive can be found at http://govinfo.library.unt.edu/taxreformpanel/
I have referred to the report several times in my writings on tax policy and reform. Hopefully the report won't completely disappear. Perhaps it can go on a visible shelf with the Treasury Blueprints from 1976 and 1984 which are on the Treasury website and also have some good ideas for serious reform. These along with the JCT simplification report of 2001, GAO tax gap studies and various other gov't reports form a very strong starting point for reform proposals, but as you mention, the constraints in the instructions and the political reality of really addressing the big parts of the tax gap pose significant challenges.
I look forward to your upcoming discussion of various parts of the reports.
Kind regards,
Annette Nellen
http://www.cob.sjsu.edu/nellen_a/TaxReform/21st_century_taxation.htm