Tuesday, June 07, 2005

AEI tax reform panel

Yesterday (Monday, June 6), I appeared at an AEI tax reform panel related to the rollout of a new tax reform book AEI is publishing, with chapters by lots of the main contributors to the tax reform debate.
The speakers on the first panel were Bob Hall of flat tax fame and Michael Graetz, discussing his plan that I have had a couple of posts about. Hall, interestingly, disclaimed the "flat tax" label, since his tax, after all, has two brackets (zero plus the positive rate). He called the flat tax label brilliant but inaccurate marketing of the plan, attributable to certain other individuals who co-designed it. He also expressed great sympathy for the David Bradford X-tax idea of having yet more brackets and thus more progressivity. Rabushka is not with him on this, however.
I asked Graetz a question reflecting the viewpoint in my last post on his plan, i.e., why would you give low-wage workers freedom from having to file any tax return rather than several thousand dollars of tax saving from a zero bracket. His reply was civil and in a good spirit, but I will admit I was not persuaded. The two main points I recall him making were (a) his payroll tax credit will address the low-end distributional problems, and (b) he has other compelling reasons for favoring his plan, e.g., avoid treaty problems that more radical breaks with current US tax practice might lead to. On (a), I continue to believe he is stuck with a dilemma resulting from the basic tradeoff between good distributional results and low-end simplification. You need information about people to treat them properly in a distributional sense, and that means, I think, that you are roughly back where you started in terms of the complexity they face. I can't say that I am sure exactly where he stands on the spectrum between more simplification and better modulated distribution. On (b), I just would say that I regard this as less of an important constraint. In principle one can renegotiate treaties (especially if one is the US and the changes don't hurt other countries in any way), and it would be nice to get a better system going in the long run.
Big consensus from everyone in the room was that the biggest problem facing tax reform is not defining a good tax base; it is the political economy problem of getting a decent plan enacted and then protecting it from the politicians and lobbyists. Death by a thousand cuts, to quote a recent Graetz title. Unfortunately, no one knows how to do this. Political economy is much harder and less determinate than straight economics.
Panel 2, which I moderated, had Kevin Hassett describing David Bradford's plan since David could not do so, and Casey Mulligan of the U of Chicago Economics Dept presenting his contrarian view that inefficient taxes are better because they constrain inefficient spending. My comment to Kevin was that I wasn't entirely sure David had found the right balance between good optics and handling transition problems. David tilted towards the latter in his last few years of working on the X tax, but perhaps too much at the expense of the former, e.g., through the use of income tax style depreciation timing plus interest on basis to make it the present value equivalent of expensing. This is an issue that I would have liked to discuss with David in this setting. Casey's point I objected to in a way that I couldn't, without unduly taking time from audience questions, make sufficiently clear. It was that he unduly treats "government spending" as a stand-in for "allocative effects of government policy." This is one of the main things I am writing about in my book in progress, tentatively called "The Use and Abuse of Fiscal Language."
Panel 3 was Ron Pearlman, noting the problems with going piecemeal towards a consumption tax without cutting back interest deductions, and Bill Gale with a general overview of these and other problems with all of the plans. By then I guess I was flagging (the sessions went straight through with no break), so I have nothing particular to add although both talks were good.

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