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REFORMING TAXATION: ADVANTAGES OF A SAVING CONSUMPTION NEUTRAL TAX BASE, AND PRINCIPLES TO GUIDE REF

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Title: REFORMING TAXATION: ADVANTAGES OF A SAVING CONSUMPTION NEUTRAL TAX BASE, AND PRINCIPLES TO GUIDE REF


1
REFORMING TAXATION ADVANTAGES OF A SAVING-
CONSUMPTION NEUTRAL TAX BASE,AND PRINCIPLES TO
GUIDE REFORMStephen J. Entin Institute for
Research on the Economics of Taxation

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Objectives of Tax Reform
  • Growth,
  • Simplicity,
  • Fairness, and
  • Visibility

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How to Achieve Objectives
  • Choose a better tax base.
  • Consumption versus Income.

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Income
  • Income is the earned reward for providing labor
    and capital to produce goods and services that
    other people value.
  • Income is proportional to effort.
  • Therefore, the fairest tax is proportional to
    income.

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Income is a Net Concept
  • Revenue less the cost of earning revenue.
  • Deductions for costs are necessary to measure
    income properly.

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Saving Is a Cost of Earning Income
  • No saving gt no interest, no dividends.
  • You can't have your principal and eat it too.
  • Therefore, the best measure of income is
    consumption. We should tax what we spend.

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Neutral Taxes
  • Do not fall more heavily on saving and
    investment than on consumption,
  • Are unbiased against growth,
  • Are simpler than the income tax, and
  • Are fair and straightforward.

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By Comparison the Income Tax
  • Taxes people more the more they work, save, and
    produce by imposing graduated tax rates.
  • Hits saving and investment harder than
    consumption.
  • Encourages consumption by penalizing saving.

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Taxing Capital Income Hurts Workers
  • Savers can always choose consumption, which is
    nice for them.
  • But when they do, investment slumps, and workers
    lose their jobs.

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Steps Toward a Fair, Flat, Unbiased Neutral Tax
Step 1. Treat all saving like pensions and
IRAs. A tax that is neutral between saving and
consumption would either defer tax until the
saving is spent, or tax the saving up front and
not tax the returns.
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Advantage Of Tax Deferred Saving Over Ordinary
(Biased) Tax TreatmentBuild-up Of 1,000 Saved
per Year
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Step 2. End Double Taxation of Corporate Income
  • A neutral tax would not tax corporate income
    twice.
  • It would tax it either at the corporate level or
    the shareholder level, but not both.

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Step 3. End the Death Tax"
A neutral tax would not tax estates because
estates are accumulated saving that has already
been taxed or will be subject to an heir's income
tax.
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Four Types of Neutral Taxes
  • Saving deferred tax (on income less saving).
  • Flat tax (no deferral, returns exempt).
  • Sales tax (on income spent, not saved).
  • Value Added Tax (on output less investment
    which equals income less saving).

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Elements of a Neutral Tax
  • All treat saving neutrally vs. consumption.
  • All employ expensing instead of depreciation.
  • All are territorial.
  • All have the same basic tax base.
  • Differ mainly as to point of collection.

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Objective Growth
  • Neutral taxation is best for growth. It can
    yield
  • More saving, investment, and growth.
    Potentially
  • Trillions of dollars of added capital.
  • Millions of added jobs and higher wages.
  • Thousands of dollars in added family income.
  • U.S. would become a jobs and investment magnet.

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Objective Simplicity
  • Neutral taxes are much simpler, even if collected
    on individual tax forms
  • No double taxation.
  • No limits on savings plans. One universal plan,
    not dozens.
  • No separate taxation of capital gains.
  • No depreciation schedules.
  • No foreign tax and tax credit.
  • No phase-outs of dozens of exemptions, credits,
    deductions.

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Objective Fairness
  • Consumption is a fairer tax base than income,
    because it respects the effort of people who
    work and save.
  • Neutral taxes can be made progressive to shelter
    the poor.
  • There is no need to tax saving and investment
    more harshly than consumption to achieve
    progressivity.
  • The simpler, clearer neutral tax would be seen to
    be fair.

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Objective Visibility
  • Only people pay taxes.
  • Businesses and things don't pay tax.
  • Taxes are best levied on individuals.
  • Voters need to see what government costs.
  • Everyone who can should pay something toward the
    cost of government.
  • Simplicity is no excuse for dropping tens of
    millions of people from the tax rolls.

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Conclusion
  • Tax reform is about-
  • Getting the tax base right
  • Setting rates that cover the amount of government
    that people want to have.
  • Raising revenue while doing less damage to the
    economy, and
  • Informing the voting public what it is paying for
    government so that they can make informed
    decisions about how much government activity to
    support.

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Appendix
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NIPA Table 5.3.6, line 9
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