An Income Tax, Not A Wage Tax: Comments on A Fair and Simple Tax System for Our Future

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An Income Tax, Not A Wage TaxComments on A
Fair and Simple Tax System for Our Future

• Peter R. Orszag
• Co-Director, Tax Policy Center
• January 31, 2005

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Moving back to an income tax

• Tax changes over past several years have been
  moving toward taxing only labor income, not
  capital income
• This proposal would move the system back toward a
  true income tax
• 1986 reform also moved in this direction, by
  reducing capital income preferences

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Wage tax vs. consumption tax

• Consumption tax Tax break only for new saving,
  not for existing capital
• Imposes tax on existing assets and future wages
  (two sources of financing for consumption)
• Bulk of economic benefit from consumption tax
  derives from tax on existing assets
• Without tax on existing assets, result is simply
  a wage tax
• All the regressivity of a consumption tax, little
  or none of the economic benefits

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Using broad tax reform to boost saving A flawed
approach

• Aim of consumption/wage taxes Boost new saving
  by reducing tax burden imposed on it
• Flaw Especially at top of income distribution
  where bulk of tax benefit is provided, tax
  preferences generate little new saving
• Asset shifting, not new saving
• Regressive without significant beneficial impact
  on saving
• This proposal correctly moves in opposite
  direction

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A better approach Two key steps

• Make it easier to save
• Evidence showing significant effects from
  automatic enrollment and automatic escalation
  (automatic 401k)
• Level the playing field for tax-preferred saving
• Evidence that contributions made by lower-income
  workers more likely to be net addition to saving
• Yet current system provides larger incentives to
  higher-income workers
• Universal credit to level the playing field

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Level the playing field
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Conclusions

• Among its many features, proposal highlights need
  to fundamentally re-think how we encourage
  private saving
• Represents very useful contribution to tax reform
  and retirement security debates