The Agenda

Thinking About Revenue Sources and Conservatism

In late September, Michael Boskin and John Cogan of Hoover touted a very smart state tax reform for California that should be a model for reform efforts nationwide.

The commission’s majority report recommendations were made public yesterday. They include a sweeping overhaul of the personal income tax code that reduces tax brackets to two from six; eliminates all deductions and credits other than for charity, mortgage interest and property taxes; and cuts the top statutory income tax rate to 6.5% from 9.3%. Most taxpayers would receive a 25%-30% tax cut and all would pay less. The commission also recommends abolition of the state’s corporate income tax and the elimination of most of the state sales tax that finances the state’s general revenue fund (as opposed to special funds for transportation, etc.). Finally, to replace the lost revenue, the commission recommends a broad-based, low-rate state value-added tax (VAT), collected on business net receipts (revenues less purchases from other businesses, including immediate expensing of capital), that is capped at 4%.

These reforms will reduce the volatility of state revenues by 40% (using commonly accepted measures) mostly by reducing the reliance on personal and corporate income taxes, and moderate the current tax code’s extreme progressivity. They also will result in a $7 billion net tax cut per year for Californians without raising taxes on any income group, as some of the new VAT would be borne outside the state and more of Californians’ taxes would be deducted against federal taxes.

Boskin and Cogan recognize the danger of creating a new revenue source, and they address it by proposing the abolition of the corporate income tax and also a hard spending cap.

Bruce Bartlett advocates a federal VAT. So do I, only I think it should fund a dramatic decrease in the personal and corporate income taxes. But I worry that Bartlett has stopped engaging center-right thinkers who disagree with him. Rather, he is increasingly harsh in taking on supply-siders. In a recent blog post, Bartlett wrote:

The other day the Wall Street Journal editorial page ran an article by Ernest S. Christian and Gary A. Robbins attacking the idea of a value-added tax for the United States. This is the second anti-VAT op-ed the Journal has run this year on top of two highly negative editorials. Only one piece has appeared favorable to the VAT and that was written by former Clinton administration Treasury official Roger Altman. Apparently, it’s okay for Democrats to get space in the Journal to promote the VAT because it allows the editorial page to maintain the fiction that only liberals favor such a tax as part of their nefarious plan to eventually tax 100% of everything. When I’ve queried the Journal about an article on why conservatives ought to support a VAT I did not get a reply.

This post appeared two weeks after the comment by Boskin and Cogan.

I understand where Bartlett is coming from. As you can guess, I don’t agree with every “Review & Outlook.” Because I think we need to cut spending (by a lot) and raise taxes (by not a lot) if we’re going to avoid fiscal disaster, plenty of conservatives — including many readers, I’m guessing — are inclined to think I’m not a real conservative. That’s frustrating. It doesn’t mean, however, that I want the conversation to end. On the central issue — whether the U.S. will once again become an entrepreneurial and dynamic economy that can lift families out of poverty and increase the standard of living for the middle class — I’m with the supply-siders, though I disagree on important details. My hope is that I can win some supply-siders over by arguing that tax cuts aren’t always the surest route to the kind of economy we all want; rather, we want the lowest sustainable tax levels to provide revenue and also the stability that entrepreneurs depend on. Of course, I’m also open to persuasion.

Now I sound kind of smug. I’ll add that I’m also totally crazy.

Reihan Salam is president of the Manhattan Institute and a contributing editor of National Review.

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