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The Agenda

NRO’s domestic-policy blog, by Reihan Salam.

My Latest Column: The Case for Shrinking the Income Tax



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My latest Reuters Opinion column lays out the conservative case for Michael Graetz’s Competitive Tax Plan (CTP):

Conservatives hate the idea of new taxes. But imagine if every time you bought a cup of coffee, it said on the receipt that you had also just paid a 12.3 percent consumption tax to the federal government. Instead of paying your taxes once a year, you would pay taxes every time you made a purchase. What better way to remind people of all of the money government spends, and all of the money government spends foolishly, than to make them pay for government several times a day?

That’s not all. Imagine also that the federal income tax only applied to income over $100,000 for married couples, $50,000 for single filers, and $75,000 for head of household filers. Households that earn less than this “family allowance” would be under no obligation to file a federal income tax return. In that case, the 12.3 percent consumption tax would pay for liberating millions of Americans from the IRS. According to a recent analysis from the Tax Policy Center, the tax policy rules in effect today will require 147,540,000 tax units to file taxes in 2015. Under Graetz’s CTP, that number would fall to 36,625,000.

Even those poor souls who still have to file under the CTP will benefit, paying a much-reduced federal income tax at a basic rate of 16 percent and a surtax rate of 25.5 percent on income above $200,000. These low marginal tax rates would improve work incentives for high earners far more than Mitt Romney’s proposed tax cut and would be an even bigger improvement relative to President Obama’s proposed tax increase for the top 2 percent of households. And though the CTP wouldn’t completely eliminate taxes on savings and investment, it dramatically lowers them, particularly for families of modest means.

But isn’t a consumption tax likely to prove a stealthy money machine? That has often been true of European VATs. Canada and Australia are a different story, as I go on to explain. These are countries that, for a variety of reasons, make for a more relevant comparison.

So even if you accept the “skin-in-the-game” thesis, i.e., that people who don’t pay for government are likely to favor its expansion, the best solution might be a highly visible consumption tax rather than a less visible expansion of the federal income tax. Take an informal survey around your office or neighborhood by asking people if they remember how much they paid in income taxes last year. And then ask them if they remember the size of their rebate check. The “genius” of income tax withholding is that it masks the bite taken by taxes. Income tax filing is obviously a boon for tax preparers, but I think we as a society could do with much less of it.

In a related vein, I recommend Dylan Matthews’ Wonkbook post on whether we should focus on the progressivity of taxes or of taxes and transfers as a whole. He cites Northwestern University sociologist Monica Prasad, one of my favorite scholars.



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