A Report Card for the President’s Tax Panel
Now here’s a perspective that certainly makes sense.
I just posted this in the comments section of the tax panels web site (www.taxreformpanel.gov). I would like to encourage everyone else to compose their own comments.
On January 7, 2005, President Bush appointed a panel to study tax reform for our country. He gave them three mandates.
- Simplify Federal tax laws to reduce the costs and administrative burdens of compliance with such laws.
- Share the burdens and benefits of the Federal tax structure in an appropriately progressive manner while recognizing the importance of homeownership and charity in American society.
- Promote long-run economic growth and job creation, and better encourage work effort, saving, and investment, so as to strengthen the competitiveness of the United States in the global marketplace.
The preliminary report is out. The tax panel is going to suggest the following:
- Limited changes to the Home Mortgage deduction (lower the allowable deduction).
- A decrease in the Employer Health care deduction.
- Do away with the Alternative Minimum Tax.
I homeschool my 8 year old granddaughter. Let’s see how I would grade her if this had been her assignment. We have three problems to solve.
- How do any of the recommendations reduce the administrative burdens of compliance? They don’t. Item A would add many pages to our already complicated, 20,000+ pages of tax code. Item B would increase the compliance code for businesses (who, in turn would raise the price of their products to cover the costs).
- Do the recommendations share the burdens and benefits of the Federal tax structure in an appropriately progressive manner while recognizing the importance of homeownership and charity in American society? No! Item A actually does just the opposite.
- Do any of the Items Promote long-run economic growth and job creation, and better encourage work effort, saving, and investment, so as to strengthen the competitiveness of the United States in the global marketplace? No, again. Item C would help, but the added cost of Items A and B, would negate any benefit.
So, here are the grades:
Assignment - Grade
1. Simplify - F
2. Share - F
3. Promote - FNow, let’s look at another plan that the Tax Panel could recommend. The Fair Tax (HR25/S25, www.fairtax.org) would replace the current tax system with a national consumption tax that will:
- Allow Americans to keep 100% of their paychecks, pensions, and Social Security payments.
- Dramatically reduce the cost of goods and services by 20% to 30% by eliminating embedded taxes.
- Allow families to save more for homeownership, education, and retirement, tax free.
- Raise the same amount of money for the federal government.
- Make American products more competitive overseas by eliminating embedded taxes.
- Tax the underground economy.
- Give every legal household a prebate for taxes on spending up to the poverty level.
- Do away with the IRS.
Now let’s check the assignment again.
- How do any of the recommendations reduce the administrative burdens of compliance? The IRS is gone. No person or business would have to ever fill out an income tax form. All compliance costs are gone.
- Do the recommendations share the burdens and benefits of the Federal tax structure in an appropriately progressive manner while recognizing the importance of homeownership and charity in American society? Yes! With item A, people would have more money to give to charity. Item C would encourage saving. Item F would ensure that everyone pays their fair share. Item G would completely untax the poor and make the tax progressive.
- Do any of the Items promote long-run economic growth and job creation, and better encourage work effort, saving, and investment, so as to strengthen the competitiveness of the United States in the global marketplace? Yes! Item A would encourage a better work effort, because the employee would actually get to keep all money earned. Item D makes our products more competitive in the global market place. Item H would eliminate all compliance cost for businesses, allowing them to have more money to create jobs which, in turn would promote long-run economic growth.
Let’s look at the grades again.
Assignment - Grade
1. Simplify - A
2. Share - A
3. Promote - AClearly, the Fair Tax more than meets our President’s mandates. If this had been my granddaughter’s assignment, she would get an A+, and I would give her the rest of the week off!
If only the President’s tax panel were as smart and fair-minded as your granddaughter....
Joshua — You ignore the possibility that the Tax Reform Commission was well aware of the FairTax and found it wanting.
Check the membership of the Tax Reform Commission. You will see the name of James Poterba of MIT. Dr. Poterba is one of the economists that the AFFT and Neal Boortz like to cite as having produced research in support of the FairTax. Check your own blog and you will see. (Boortz never refers to Poterba by name, probably because he doesn’t know who he is. But he routinely claims that “MIT economists” developed and/or endorsed the FairTax. As far as I know, Poterba is the only MIT economist that has ever been cited by AFFT, so he must be the guy that Boortz is referring to.)
Thus, I believe that the Tax Reform Commission was well aware of the FairTax. And I have no doubt that they determined that the claims being made by AFFT and Boortz were wildly exagerated and simply wrong.
I really wish that you FairTax proponents would admit, just once, that not every opponent of the FairTax loves our current system or somehow benefits from it (because we’re all lobbyists or tax accountants). Rather, many of us have reviewed the plan and have concluded that, among other things, the numbers just don’t work.
Hayden,
I do no such thing. You ignore the possibility that I am well aware that the Tax Reform Commission was well aware of the FairTax and found it “wanting.”
What I — or, more accurately, the author of the above letter — take issue with is the fact that the commission failed to propose any kind of true reform. They FAILED to do the job the president assigned to them.
Who has ever said the Tax Reform Commission wasn’t aware of the FairTax? Nobody.
We claim that they did not undertake any kind of true reform. They just piddled.
And, there are many reasons why they may have found it “wanting” that have nothing to do with data or with economics, and everything to do with preservation of the existing power structure in Washington politics.
You should cease speculating about Dr. Poterba’s views and actions until you have actual evidence to present.
It could very well be that the majority of the commission simply relied on data from organizations utilizing static economic models that are heavily biased in favor of the status quo.
Since I have never claimed that “every opponent of the FairTax loves our current system,” I don’t know what you’re talking about.
What I will say is that liberal politicians love the income tax system, and are likely to oppose the FairTax because it removes so much of their power to game the American electorate.
So give the straw-man arguments a rest. Here’s a real criticism for you to chew on: I think certain of the FairTax’s most strident opponents are Marxists, to one degree or another, who are reluctant to admit it publicly.
And so they endlessly complain that “the numbers don’t work” even when their true reasons for opposing the plan are largely political and philosophical.
Man, Joshua. That’s as mad as I’ve ever seen you on this board. I didin’t mean to attack you personally. But here are a few points in reply:
1. I, too, would be pissed if all the tax reform commission comes up with is limiting the home mortage deduction and the employer health care deduction. I mean, what would be the point of doing that?
However, I would not be entirely surprised. When he was governor of Texas, Bush also appointed a state tax reform commission. All they did was recomend reshuffling property taxes around. Bush, though, signed it into law and then got promoted by the Republican power brokers as a great “tax cutter.”
2. One can be in favor of a simplified, moderately progressive tax system without being a Marxist. Probably most Americans would support such a system, as did Ronald Reagan.
3. How many “liberal politicians” that “love the income tax” have been in power over the last decade? Oh, you must mean Republicans.
4. I’m still waiting for Boortz or AFFT to produce even one study showing that the numbers work. I’ve cited you (and Boortz) several that found the numbers do not work.
As I’ve said before, I know there are valid economic arguments in support of a national consumption tax. But until and unless Boortz, Linder and AFFT address valid criticsm of and questions about the FairTax (instead of just attacking their critics personally) they deserve to have their plan ignored.
1. Dittos.
2. Sure. But that’s not what the President asked the panel to come up with — on the contrary.
3. Yes, I definitely include most Republicans among my list of “liberal politicians.”
4. I, too, want more data.
You have cited many articles, but only one study that allegedly uses the assumptions of the FairTax. That was the study by Gale in Tax Notes, which nobody I’ve ever talked to (including you) even claims to understand. Since Gale has made it clear he is opposed to the FairTax on just about any grounds he can think of, I remain highly skeptical of his conclusions.
There is apparently a new set of papers by AFFT coming down the pike. Drafts are currently in beta circulation, and I’ve been meaning to request a copy. I look forward to discussing them here once they’re made publicly available.
Meantime, what’s wrong with the very straightforward numbers Quadrupole provided?
UPDATE: Actually, that article by William Gale in Tax Notes is not a peer-reviewed study. It is only a “study” in the same sense that the notes published by AFFT on their web site, and Quadrupole’s calculations above, are studies.
Well, as I understand it, TaxNotes is a particularly respected tax journal, so even if the article was not technically “peer reviewed”, it will in fact be reviewed and subject to criticism by his peers. Actually, now that I think about it, in might be worthwhile to take a look at subsequent issues of Tax Notes to see if his article was commented on or criticized. You might find something interesting, one way or the other.
For more scholarly material on taxation, you might look at Dale Jorgenson’s textbook: Investments III: Lifting the Burden, published by MIT Press, in which, as I understand it, he is quite critical of the FairTax. Though, I freely confess, I did not shell out the $70 that it would have cost me on Amazon.com.
Regarding Quadrupole’s calculations, I thought I had already commented on them, but I can’t find either his calculations or my comments, but from memory, I think the main issues/questions are the following:
1. Do these calculations take tax avoidance and tax evasion into consideration. A 10% rate of tax avoidance would push the required consumption tax rate up 10% as well.
2. Since his calculations were based on GNP, which included “imputed rents” for owner-occupied homes, did his calculations tax imputed rents.
3. Since interest expense is also included in GNP (at least, as much as I understand it), did his calculations also tax such interest (e.g., credit card and mortgages.)
I am not saying Quadruple did or did not include such things; I don’t know. I just recall those were big issues for Gale.
4. Finally, is Quadruple an economist? Not that one needs to be an economist to make reasonable calculations, but an economist might know better than we non-economists as to exactly what is included in GNP that might not be taxable.
I’m glad to hear that AFFT will be coming out with a study. That’s when I think things would really start getting interesting. It would be nice to see some more folks more educated about the numbers than i actually debate this stuff. You have my email address. If you get a copy or if it gets posted somewhere, I would greatly appreciate a heads up.
Regards,
Hayden
Hayden, the Quadrupole figures may not include the above information — but they also don’t include the substantial expansion of the U.S. economy that would result from eliminating income taxes and welcoming back into the country the $11 trillion or so in investment funds that has been driven into offshore accounts by the current U.S. tax code. In the end, though, I share your thirst for more detailed (and understandable) studies being made public.
you apparently did not watch the C-Span showing of the hearing.
The consensus to not promote the national sales tax was based on concerns over evasion of paying the tax.
A practical implementation would need tax rates of over 40%
and this would make evasion rampant in the eyes of the panel.
Thanks for clarifying, Harold.
I would be interested to know what their version of a “practical implementation” consisted of — e.g., exempting certain industries (health care, food, housing, clothing, government) from taxes?
Such assumptions have been made before in critical analyses of the FairTax, and would certainly drive up the “necessary” rate of taxation.
Does anybody have the hearing on videotape? Or know where a transcription can be found online?
Hayden,
1. Texas does not have an income tax. Property taxes are not part of the IRS. Don’t compare apples to oranges.
2. The Income Tax as we have today is #2 on the Marxist Communist agenda. Google Karl Marx and read it. BTW the public school system is #10.
3. The Tax Panel was given a set a rules to use and they did not do follow those rules but they sure did have a good time visiting lots of different cities on the taxpayers money.
4. There wasn’t a single member of the tax panel that came from the general public. There should have been at least four people who would have been able to keep them grounded on the real world that we live in.
5. We need to blow up “K” street.
I watched the C-span coverage of the the President’s Tax Reform Panel Hearing and more specifically Edward Lazear’s presentation of a National Sales Tax Option.
I have reviewed again what I had recorded and am struck by the stumbling and mixing up of numbers and concepts in his presentation.
It was such a cursory overview and no one seemed to have gone into great depth on the numbers. Though Mr. Lazear tried to point out pros and cons he got his numbers mixed up and certainly did not seem to have a true mastery of the concepts and was more keen on finding the negatives for the panel to hang their hat on. ( though inaccurate use of data)
Other panel memebers questions were also lacking in depth or understanding of such a major tax replacement plan.
For their own convienance they used a negative argument about a National Sales Tax plan to justify their position but left out the many facts and features of the Fair Tax which have already addressed those concerns.
Mr. Lazear did not lay out the full features of the Fair Tax Plan that addressed almost all of his negative points.
None of the Panelists seemed to be even knowledgeable enough to discuss the plan. Their questions and points to Mr. Lazear showed a shockingly poor understanding of even the 45 FAQs on the Fair Tax web site letr alone theother research that supports the concept.
No one challenged his assertion that this tax change would hit the Middle class more than the working poor or the Rich. The Fair Tax numbers disagree with that. No one challenged his tax evasion numbers, which I beleive are way off. Porterba question what the evasion numbers were from and Lazear said they were anecdotal from two swiss tax experts but had no supporting data.
If they showed up to my class and had demonstrated such a poor understanding of this issue, I to would have given them a Grade of F.
LaZear left out many positive points and supporting data of the Fair Tax including:
1. Replacement of the Payroll Tax. Providing a better funding source for Social Security and Medicare.
2. Easier Home ownership under the Fair Tax. ( certainly better than capping the mortgage deduction)
3. Fair Tax allows the US to compete with low wage countries because of Zero Corporate and business taxes under the Fair Tax. The Fair Tax creates Lower priced manufactured goods for export. In turn providing tremendous economic growth, increased manufacturing jobs, greater exports.
Locally, our Dephi plant may shut down because we can not compete with low wage Mexican production. The Fair Tax will help Delphi stay open and help save our local economy.
4. The economy will save billions in tax compliance costs.
We could go on but the shock is this is not what was discussed by the Panel and their questions and dismissal of the paln shows they have not studied its merits in a detailed and thoughtful way.
Let’s dissolve this panel and start over.
Joshua, Judith and Merrill –
I think we can all agree on the following:
1. We need to eliminate K Street power. (Or, blow it up, as Judith says.) But not just on the tax side, but also on the spending side (i.e. no-bid contracts for rebuilding Iraq and Lousiana).
2. If the news reports are true, the proposals that are currently being discussed from the Tax Reform Commission are a joke. If that’s all they come up with, they do deserve to be disbanded (and, maybe, sent to Singapore for caning.)
3. Any true tax reform should:
a. Greatly simplify and streamline tax obligations.
b. Help our businesses compete better by eliminating corporate income taxes and Social Security and Medicare taxes.
We just disagree on what to do about no. 3. I believe that 3.a can be accomplished by simplifying our current tax code and removing all exemptions and deductions.
Regarding 3.b, the revenue lost from eliminating corprate income taxes and SS and Medicare taxes will need to come from somewhere. It either needs to come from personal income taxes, a national consumption tax, or some other source or combination.
If Joshua is right, that eliminating the corporate tax obligations will greatly boost our economy (which I believe it would), then we could just as easliy capitize on this growth through relatively low personal income taxes as we could through taxes on consumption.
Alas, we will probably never agree on the relative merits and disadvantages of consumption taxes versus income taxes, but at least it makes for an interesting discussion.
[...] I’m elevating the following remarks (by Merrill Bender) from the comments section of another post, because they provide valuable insight into why the President’s tax panel dismissed the FairTax from among its recommended options: I watched the C-span coverage of the the President’s Tax Reform Panel Hearing and more specifically Edward Lazear’s presentation of a National Sales Tax Option. [...]
The Tax Reform Commission recently published their report. Though I do not agree with their proposals, they did devote an entire chapter to the FairTax. (Chapter 9). In that chapter, they determined that the FairTax proponents had miscalculated what the revenue neutral rate would need to be, primarily due to incorrectly accounting for the amount of the FairTax to be paid by and received by the federal government.
According to the Commission, the revenue neutral rate to replace ONLY the income tax (i.e., not social security, medicare or estate tax) would need to be at least 34% (on a tax-exclusive basis), but probably much higher. In order to replace all federal taxes, the FairTax rate would need to be much higher still.
The Commission’s report came out a few weeks ago. I’m surprised that I have not seen any discussion or critisim of their analysis of the FairTax from Boortz or the FairTax boosters. Maybe I’m missing something. Could it be that they are finally throwing in the towel?