Four Approaches to Tax Reform

By Murray Weidenbaum,
Center for the Study of American Business at Washington University

Tax reform comes in many shapes and varieties and the motivating factors for tax reform are varied. Reducing the tax burden will increase economic growth, resulting in more saving and investment. Simplifying tax preparation and reducing the role of government in the lives of its citizens are frequently cited as reasons for modifying tax codes.

Maintaining revenue neutrality also comes into the picture when discussions of tax reform begin. On the following two pages of this issue of Online Nevada is a side-by-side comparative analysis of four major tax alternatives now being discussed in the United States: (1) a flat tax, (2) the saving-friendly “USA Tax,” (3) a national sales tax, and (4) a value-added tax (VAT). Several caveats can be offered right off the bat:

• None of the proposals is as simple as its proponents claim;
• Each has substantial advantages and disadvantages; and
• All proposals to overhaul the federal tax system should be structured to raise the same amount of revenue as the existing federal income tax.

In general, there is strong support for fundamental tax reform of some type. Reform should simplify tax collection and reporting, base taxation on consumption and reduce the role of the IRS in the daily life of the nation.

A legislative bill encompassing any approach to tax reform can be expected to take years to get through the legislative process. Substantial support must be built up before any specific proposal might be considered by Congress, and then a specific bill must go through congressional hearings and be approved. And finally, if a bill gets that far, it must survive a possible presidential veto.

One possible solution would be to combine the flat tax and the “USA Tax.” This would exempt savings and investment expense from taxation. There would still be progressive rates, but flatter, progressing much less steeply. A few itemized deductions could be retained and special “transition provisions” might avoid large “windfall” losses.

Of the four types of reform represented on the following pages, the flat tax seems to be the most controversial. To help answer many questions about a flat tax, elsewhere in this issue of Online Nevada readers will find excerpts of a speech flat tax sponsor Congressman Dick Armey delivered late last year before the National Press Club entitled, “The Flat Tax is Our Future.” Also in this issue of Online Nevada is an analysis of another flat tax recommendation by Eric Toder, Deputy Assistant Secretary of the Treasury for Tax Analysis, entitled, “National Commission’s Recommendation for a Flat Tax Falls Flat.”

What might be the best of these solutions to replace or at least greatly modify our presently awkward, intrusive, impractical and costly income tax? You be the judge.

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