Friday, June 02, 2006


I Try To Be Fair

Even when disagreeing with other commentators, I try to fairly describe their arguments. One part of that process is to, whenever possible, link to their comments.

Yesterday, the Tax Foundation's Tax Policy Blog had a report on a CRS study, "Flat Tax Proposals and Fundamental Tax Reform: An Overview." Tax Policy Blog then presented what purported to be the summary of the CRS study as set forth in the study. However, the excerpt was not complete and was edited to make it appear that the CRS study agreed with the Tax Foundation's basic tax policy recommendations. That is not the case as the study itself states:
Should the tax base be income or consumption? Is one inherently superior to the other? How do they stack up in terms of simplicity, fairness, and efficiency —the three standards by which tax systems are generally assessed? There appears to be insufficient theoretical or empirical evidence to conclude that a consumption-based tax is inherently superior to an income-based tax or vice versa.

One issue associated with the choice of a tax base is equity — how the tax burden will be distributed across income classes and different types of taxpayers. For example, a tax is "progressive" if tax paid as a percentage of income increases as income rises. Although some types of consumption taxes can be designed to achieve any desired level of progressivity with respect to consumption alone, their progressivity with respect to income could only be approximated. Also, a consumption tax would involve a redistribution of the tax burden by age group, with the young and old generally bearing more of the total tax burden than those in their prime earning years. And the transition from an income-based tax to a consumption-based tax would have the potential for creating windfall gains for some taxpayers and losses for others.

A definitive assessment cannot be made of the effects of taxing consumption on either economic efficiency or the aggregate level of savings.
Although the current tax system's distortions of the relative attractiveness of present and future consumption (saving) would be eliminated, to raise the same amount of tax revenue, a consumption-based tax would require an increase in marginal tax rates (since consumption is smaller than income). This action, in turn, would increase the current system's distortion between the attractiveness of market (e.g., purchased products) and nonmarket activities (e.g. leisure). The net effect on overall economic efficiency cannot be ascertained theoretically. In addition, economic theory indicates a consumption tax would not necessarily produce an increase in saving. The increase in after tax income might reduce saving, while the increase in the return to saving may increase it; the net result is uncertain.

A positive aspect of a consumption-based tax is the ease with which the individual and corporate tax systems could be integrated. In addition, the problems introduced by separate provisions for capital gains, attempts to distinguish between real and nominal income, and depreciation procedures would essentially be eliminated. It is doubtful, however, that a consumption-based tax would have much effect on the complexities introduced into the system to promote specific social and economic goals. Many of the same factors that influenced the design of the current income tax system would exert the same influences on the final design of a consumption tax.

Whether one prefers income or consumption, one tax rate or multiple tax rates, a critical point to remember is that the benefits to be derived from tax revision would result from defining the tax base more comprehensively than it is under current law. A tax with a base that is comprehensively defined would prove more equitable and efficient than a tax with a less comprehensively defined base.
(Footnote omitted, emphasis added.)

In other words, the study concludes that the Tax Foundation's hobbyhorse can't run.

4 comments:

Anonymous said...

What are you talking about? The SUMMARY is pasted directly (word-for-word) from the CRS report into the blog post.

You are taking the INTRODUCTION. They pasted the SUMMARY. There is a difference. In other words, they are 100 percent right and you are 100 percent wrong.

And if you would read the commentary on the blog post, they are actually defending reform that would still have a progressive rate structure? What more do you want? They are merely emphasizing that reform should center around changing the base, not merely making a flat rate.

Stuart Levine said...

A slightly redacted version of the summary is posted word for word, but there are editorial "cuts" and addition of typeface emphasis that change the thrust of the actual summary.

They do not "defend[] reform that would still have a progressive rate structure." Rather, they argue that there is a consumption tax proposal that does allow for some progressivity. However, as the CRS report notes, any consumption tax poses distributional problems and will be subject to the injection of complexity due to "same factors that influence[] the design of the current income tax system."

Anonymous said...

Just admit it -- you were fishing for some sort of bias here that did not exist. The only part of the summary that was "redacted" was merely the listing of the tax bill items before Congress.

And what about the part of the summary in which they emphasized via bold font? Here it is -- decide for yourself on how biased this is:

Most observers believe that the problems and complexities of our current tax system are not primarily related to the number of tax rates but rather stem from difficulties associated with measuring the tax base.

Andrew said...

As the author of that post, I can tell you that I -- speaking for just myself personally -- favor more of a Bradford-X-Tax style tax system, not a so-called "flat tax" system that you assume I'm advocating for.

As I noted in the post, most compexity in the federal individual income tax code derives from tax base issues, not the progressive rate structure per se. So flattening the rates and brackets alone won't do much to improve efficiency.

And given that we live in a democratic system where people disagree strongly about the overall level of progressivity we ought to have in the tax system, I'd say the Bradford X-Tax is a good compromise.