Tax reform
I applaud the tax reform proposal just put forth by Senators Ron Wyden (D-OR) and Judd Gregg (R-NH). Lowering the top corporate tax rate is very important for improving the competitiveness of our exports, and keeping the top individual rate at 35% while repealing the dysfunctional Alternative Minimum Tax is an achievement in itself.
Washington invariably prefers the quick fix and ignores the underlying causes of whatever problem it faces. What better example than the financial crisis? At its most fundamental level, we underpriced the risk of mortgages and other financial assets. Why? President Obama and Congress have focused on the moral hazard of "too big to fail" financial institutions driven by bonus crazy CEOs making bets backed by government insurance. There's plenty of truth in that, but the deeper cause was easy money. A month ago, I defended Ben Bernanke's refutation of charges that the Fed's 2004 to 2006 easy money policy was to blame. So if, Fed monetary policy wasn't too easy, what was wrong? The corporate income tax deduction for interest produced a -6.4% tax rate on debt financed investments, while the double taxation of equity income (dividends and capital gains) produced a 36.1% tax on equity financed investments according to this 2005 Congressional Budget Office study. See Table 1.
The drumbeat for a value added tax has begun. On September 29, presidential advisor Paul Volcker told Charlie Rose that the U.S. should consider a VAT or a carbon tax to get its deficit under control. On October 5, House Speaker Nancy Pelosi talked with Charlie Rose about the competitive advantage enjoyed by foreign automakers because of our health care costs, "They have a competitive advantage. Somewhere along the way, a value-added tax plays into this. Of course, we want to take down the health care cost, that's one part of it. But in the scheme of things, I think it's fair look at a value- added tax as well."
To second Bruce, the 1986 tax reform really started in January 1977 with Treasury's groundbreaking Blueprints study under Secretary Bill Simon, which proved you could establish a consumption-based income tax without altering the income distribution. It was much simpler and more efficient too. A year later, Senator Bill Bradley and Congressman Dick Gephardt introduced the first version of their tax reform plan, which I formulated at the Joint Committee on Taxation using the Treasury tax model. These plans were actively discussed and reformulated for years. In 1981, Ronald Reagan swept into office and pushed through the Roth-Kemp tax cut (which I also formulated) with 10-5-3 depreciation. This created considerable political and economic pressures that led to tax reform in 1986. In particular, Bob McIntyre of the labor backed Citizens for Tax Justice created a furor publishing lists of large corporations that legally paid zero tax. Treasury worked up a revised tax plan in early 1984, but Secretary Donald Regan kept it under wraps to avoid hur
From Scrappleface:
House Republicans plan to introduce a conservative alternative to the Rangel alternative to the Alternative Minimum Tax.
