Wednesday, November 17, 2004

Interesting times

The Bush Administration's two main domestic policy initiatives for 2005 are ostensibly tax reform and Social Security. As these are among my main areas of professional interest, you can guess that I will be all over the action, as it develops, like a cheap suit. Perhaps I should say if it develops; tax reform may be headed straight for a blue ribbon commission, meeting somewhere underneath the Potomac River.
Since I consider markets and incentives to be important, although also favoring progressive redistribution, I would be a sure bet to have partial sympathy with intelligent and well-designed conservative proposals in these areas. But the Administration's track record does not inspire confidence, to say the least. These guys like to do things on the cheap in the Rumsfeld sense, if not in the budgetary sense.
Tax reform seems unlikely because, unless it loses revenue, it has to have losers as well as winners. Something like the flat tax would be a huge improvement on present law, the reduction in progressivity aside. ("Other than that, Mrs. Lincoln, how did you like the play?")
Better than that would be the X-tax, David Bradford's version of the flat tax that has more brackets. (A non-flat flat tax, although the flat tax is also a non-flat flat tax since it has a zero rate bracket.) Clintonian New Democrats should consider advocating progressive consumption taxes, a subject I and many others have written about, and that can come in several different forms.
The Administration has not studied tax reform and has essentially no expertise about it, the possibility of their consulting Glenn Hubbard aside. I suspect that they don't trust the Treasury staff any more than the CIA or State Department staffs.
[CORRECTION: Bruce Bartlett has drawn my attention to documents showing that the Treasury under Paul O'Neill did study tax reform. One more example of how O'Neill was great in many ways even if politically maladroit.]
On Social Security, the big problem is the system's $10 trillion fiscal gap. Or rather the overall fiscal gap, for all government programs, that stands at an estimated $73 trillion. What do "individual accounts" do for this? It depends on how they're done. One way of thinking about it is that you increase the fiscal gap by pulling payroll tax revenues out of the system to fund the accounts, and you reduce the fiscal gap by reducing promised Social Security benefits under the existing system. So the effect on the fiscal gap depends on which is greater. Any guesses about how the Administration is likely to handle this? ("You'll still get your cake, but now you can also save up for ice cream.")


James Edward Maule said...

Welcome to the taxblogosphere or whatever it is called. I look forward to what you have to say on these two interesting and important topics. I think you're right; we'll be producing thousands of words of commentary for the next few years.

And, ok, you can cover whatever else comes up as long as you don't take my chocolate chip cookies. :-)

Jim Maule

Jack Bog said...

What do you think of Graetz's suggestion in The Times of a 14% VAT, coupled with a $100K income tax personal exemption? Too "blue ribbon panel-ish"?

Daniel Shaviro said...

Jim, thanks for the welcome, and chocolate chip cookies are too fattening for me these days anyway.
Whoa there, Goddess, I think there's a little bit of room for behind the veil utilitarianism (I don't buy Rawls) without signing up for Comrade Stalin's gameplan. And some of my students seem to like being "poisoned." Lucrezia Borgia couldn't have boasted of that.
Jack, I would guess that Graetz's revenue estimates are suspect. In his book he gives rates that are based on assuming the full tax on the first $75K (as it was at that point) kicks in the moment you are one cent over. That type of approach, which he did knowingly so he could state a lower rate, does not inspire confidence. The basic idea he is peddling has possible merit, except it doesn't address all of the tax planning and incoherence issues of our income tax and hence wouldn't reduce the business planning issues that waste lots of resources. Plus, what is the political economy of how the income tax would develop after the change? Possibly even worse than it is now; at any rate, one would have to think this through a bit.

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