Revisiting Michael Graetz’s Competitive Tax Plan

by Reihan Salam

Having followed the evolution of Michael Graetz’s Competitive Tax Plan (CTP) since at least 2004, when he published an op-ed on the subject, I’m pleased to see that it’s getting more attention. Bruce Bartlett touts its virtues at Economix and Graetz published an essay revisiting his proposal in The American Interest late last year. Though I am somewhat more partial to a Bradford X tax, which Josh Barro and Alan Viard have championed, Graetz’s CTP would represent a significant improvement over the status quo.

Yet it’s safe to say that many conservatives will balk at its embrace of a VAT, even one that is used to fund a generous exemption from the income tax. In Canada, for example, the VAT, dubbed the Goods and Services Tax or GST, remains extremely unpopular. Stephen Harper’s government has been far more eager to cut the GST than the income tax, despite the fact that the GST is widely seen as the less economically damaging of the two. One can draw a number of conclusions from the Canadian experience, one of which is that implementing something like the GST might prove politically problematic if not fatal (some attribute the near-demise of the Progressive Conservatives to passage of the GST) and that it will never be wholeheartedly embraced. If this is true, however, an American GST by definition wouldn’t prove to be a stealthy money-machine, the rate of which could be increased with impunity. To the contrary, it would be a highly visible levy paid for by virtually all Americans on virtually all transactions, thus keeping the cost of public expenditures front of mind in daily life. In this sense, an American GST could represent a turn away from income tax withholding, which is arguably the real stealthy money-machine in the tax code. 

On a tangential note, Graetz notes the following about the 2015 version of his proposal:

Estimates for 2015 suggest that my proposal is essentially revenue and distributionally neutral with a VAT rate under 12.5 percent, a 15 percent corporate income-tax rate, and tax rates for married couples of 16 percent on income between the $100,000 family allowance and $200,000 and 25 or 26 percent for income above $200,000. Offsets are provided for low- and moderate-income families.

Note the contrast between Graetz’s proposal and Len Burman’s proposal, which envisions a federal VAT earmarked for health expenditures in the range of 18-25% and a two-rate income tax (15% and 25%) that starts on the first dollar of earnings, with generous payroll tax credits and fully refundable child and dependent care tax credits. This stark difference derives from the fact that Graetz is aiming for revenue neutrality while Burman intends to fund the higher level of public expenditures that will flow from an aging population and the expansion of health entitlements. 

All of this is to say that an assumption of revenue neutrality might not be entirely realistic if we want to get a sense of the taxes we’d actually pay under some future tax code.