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

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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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