July 28, 2021

Economix Blog: Bruce Bartlett: How to Avoid Reinventing the Wheel on Tax Reform


Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul.

An extensive discussion of tax reform is likely to take place over the next couple of years because it’s necessary and long overdue and because both political parties have things they hope to get out of it. Taken together, these suggest that something might actually happen.

That’s the premise of my new book, “The Benefit and the Burden: Tax Reform — Why We Need It and What It Will Take” (published today by Simon Schuster).

Today’s Economist

Perspectives from expert contributors.

Like many inside-Washington policy debates, much of that involving tax reform is unintelligible except to those who understand the jargon, players, history and unstated assumptions that underlie it. For those interested in following the discussion, which is likely to be protracted, my book is intended as a primer on some of the basic issues and concepts that will inevitably be part of the tax debate.

One of the main points I make is that tax reform is not a new subject, and many issues likely to be in the forefront of the debate have already been pretty thoroughly analyzed in ways that are still relevant.

Here’s one good example: “Blueprints for Basic Tax Reform” is perhaps the most important tax study of the postwar era. It was published 35 years ago this month – in the last weeks of the Ford administration. For many years, it was difficult to find and known only to hard-core tax experts; fortunately, the Treasury Department has made it available on its Web site.

The “Blueprints” study is important because the fundamental debate on tax policy is between two opposing ideas about the tax base – that is, what is taxed.

Historically, the “liberal” idea has been based on a definition of income devised by the economists Robert M. Haig and Henry Simons. It consists of all consumption during a calendar year plus the change in net worth. Thus, it consists of everything a taxpayer takes out of the economy plus the additional amount he or she could have taken out without diminishing her or his net worth.

Under a Haig-Simons definition of income, unrealized capital gains would be taxed as ordinary income, homeowners would be taxed on the imputed rent they pay to themselves by virtue of, in effect, being landlords who rent to themselves, and workers would pay taxes on health and other benefits they receive from their employers over and above their cash wages, among other things.

Almost all discussion of tax policy and tax reform from a liberal point of view assumes that the Haig-Simons definition of income is the correct one. Anything that deviates from it is an unjustified tax loophole, often called a “tax expenditure.”

The contrary “conservative” view is that only consumption should be taxed. This can be done directly, such as through a retail sales tax or value-added tax, or indirectly by exempting all saving from taxation.

Think of it this way. There are only two things one can do with income – save it or consume it. If saving is not taxed, all taxes must necessarily fall on consumption. The idea of taxing only consumption is most associated with the work of the economists John Stuart Mill and Irving Fisher.

During most of the postwar era, virtually all tax reform discussion was premised on the Haig-Simons view, and the Mill-Fisher view was largely forgotten. The tax reform acts of 1969 and 1976 represented efforts by liberals to make the tax code conform as much as possible to their vision. There was essentially no conservative alternative, and both bills were signed into law by Republican presidents.

Treasury Secretary William E. Simon, who served from 1974 to 1977, was disturbed by the lack of a conservative vision of what an ideal tax system should look like, and he recruited the Princeton economist David Bradford to come to Washington and devise one.

“Blueprints” was the result. It proposed two ideal tax systems: one based on a liberal Haig-Simons definition of income and another based on the conservative idea of taxing only consumption.

The liberal alternative in Professor Bradford’s study was largely ignored, because most tax theorists already understood and accepted it. But the conservative option was received as a revelation by conservatives, many of whom didn’t know there was a coherent conservative philosophy of taxation.

Subsequently, the “Blueprints” outline formed the foundation of the flat tax, Fair Tax and just about every other comprehensive conservative tax reform plan.

The reason why the “Blueprints” study remains relevant is that both liberals and conservatives have lost touch with the basics that underpin their respective philosophies of taxation. That is because since the Tax Reform Act of 1986 virtually all tax debate has either been about raising taxes to reduce the deficit or cutting taxes to stimulate growth.

First principles of taxation have been absent or implied rather than stated forthrightly. It would improve the debate on tax reform if each side understood the basics of its own philosophy.

In particular, both have forgotten the importance of defining the tax base properly, and both emphasize the rate schedule far too much. The truth is that statutory tax rates are far less important, either for the economy or fairness, than either side understands.

One goal of my book is to remind people that much of the heavy lifting on tax reform has already been done. The “Blueprints” study is just one example.

Both parties would benefit from better understanding the history and basics of their own tax philosophy. It would both save time and increase the chances that a new tax reform would improve the tax code if they get up to speed before tax reform becomes a partisan political football.

It is not necessary to reinvent the wheel. Policy makers can learn a lot about where we ought to be going from tax reform efforts in the past and the insights of experts whose work is still relevant. And thanks to the Internet, it is easily available.

Article source: http://feeds.nytimes.com/click.phdo?i=802bc399abbf8f822e5b4be1aea7738b

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