Michael Graetz, a professor of tax law at Columbia University and a former Treasury Department official, has released the latest iteration of his Competitive Tax Plan (CTP), a tax reform proposal he describes in detail in 100 Million Unnecessary Returns (2008). Last year, I argued that conservatives have good reason to embrace the Graetz plan, and I’m very curious to see if it enters the tax reform conversation over the next few years. The basic architecture of the CTP is simple: first, the plan shrinks the personal income tax, exempting the vast majority of U.S. households (single filers earning under $50,000, joint filers earning under $100,000), and the corporate income tax; second, it replaces the lost revenue with a broad-based new tax on goods and services (a GST), modeled on the modern value-added taxes used in Canada, Australia, and Singapore. To protect low- and moderate-income families, the CTP also includes payroll tax credits that effectively eliminate the payroll tax for low-income workers and expanded refundable child credits. One of the chief virtues of the CTP is that it eliminates taxes on savings for the vast majority of Americans, and it greatly reduces taxes on savings and investment for all Americans. It has many of the advantages of the Bradford X tax, a progressive consumption tax that has been praised as a growth-friendly alternative to the income tax, yet it doesn’t require revising various international treaty commitments, a formidable obstacle to a truly ambitious tax reform.
The strongest case against the CTP is that because it involves the creation of a new tax — the new U.S. GST — without eliminating another tax, there is a danger that it will encourage increases in the overall tax burden. It is worth noting, however, that since the creation of the Canadian GST, its rate has been cut more than once. The virtue of the Canadian GST, which its U.S. counterpart would mimic, is that it is highly visible, and thus highly politically salient. The income tax on high-earners, meanwhile, benefits from the fact that high-earners are politically influential. A much larger share of Americans would think of themselves as taxpayers, including those who are insulated from the GST by payroll tax credits and refundable child credits, as they will see the impact of federal spending on every retail transaction. Graetz’s CTP is in this way the smartest way to address the concern that a growing number of Americans don’t have “skin in the game” when it comes to the cost of government.
David Wessell of the Wall Street Journal has more — and he quotes Graetz on why current tax reform efforts that focus on the corporate income tax aren’t likely to succeed:
“I don’t think that Congress can get to a corporate rate low enough to solve the international tax problems we now face,” he says. “There’s a gap between those like Dave Camp, who seem to want only to tax income earned in the U.S by U.S. multinational corporations, and Max Baucus and Senate Democrats, who seem to want to tax income earned anywhere in the world by a U.S. company. That gap is simply too large to bridge without a new revenue source to get the corporate rate down to a level where that doesn’t matter much, if at all.”
A number of conservatives have entertained the idea of some kind of business consumption tax in the past, so one hopes that the CTP will be given close consideration.