Tuesday, October 18, 2005

Very, very interesting

Perhaps it's just another trial balloon from the Tax Reform Commission, or perhaps it's for real. But in any event, a Ryan Donmoyer story, just posted in Bloomberg.com here, bears what proves to be the misleading heading: "Bush's Panel May Propose Version of Flat Tax in Final Report."

What makes it potentially misleading is that what they are said to be considering proposing is David Bradford's X-tax, not the familiar flat tax as such.

Technically, the headline is accurate, in that the X-tax is indeed derived from the flat tax. It is, at the least, a "variant" of the flat tax. But it isn't really a "version" of the flat tax, because it isn't flat.

True, the flat tax isn't flat either, since it has a zero bracket. But when you have multiple brackets like the X-tax, it is simply misleading to call it a "version of the flat tax." Not to malign Donmoyer or assert intentionality here, but it sends a signal about the distributional aspects of the proposal that simply is not accurate. The X-tax, depending on its design, can indeed be as progressive as the current income tax, or even more so given the ease of sheltering economic income under the current system.

So I hope Democrats, progressives, etc., will give this a serious look on the merits even though it comes from a Bush-appointed panel, and even though it is related to the flat tax (which they correctly regard as significantly less progressive than current law).

Fat chance, I suppose. On the hopeful side, Bill Gale of Brookings doesn't outright slam it, noting that the X-tax is "an effort to take the flat tax and make it more progressive." I appreciate that Gale may oppose it on the merits in good faith, and that's fine. But others on the liberal side, less well-informed and responsible, will no doubt start baying at the moon any minute now.

Meanwhile, those inclined to oppose the X-tax should note who DOES slam it in the article: Skadden attorney Pam Olson, who was the Treasury Assistant Secretary for Tax Policy, under the Bush Administration, from 2002 to 2004. Olson predicts that it will "land with a thud," warning that under it, as the article paraphrases, "U.S. companies would stop issuing bonds, municipalities would face higher borrowing costs, [and] the housing and life insurance industries would become less attractive to investors."

This is the usual interest group, business-as-usual pablum. No insult intended to Olson here, but clearly she appears to be representing those interests, as one would expect. Something for people not affiliated with those interests to keep in mind.

It is ludicrous to say that U.S. companies would stop issuing bonds under the plan. Would grass grow in the streets, too? Bond interest would no longer be deductible, since financial instruments are ignored by the X-tax. But the interest income wouldn't be includable to investors. So the change is a wash - except insofar as the companies have been issuing bonds to tax-exempts (which is exactly what they do most of the time) so that their business income ends up being totally untaxed. Is that what we need to stop grass from growing in the streets, when other economic activity is being taxed?

It actually is possible to keep municipalities from losing overall under the change. E.g., it's well known that direct federal grants and revenue-sharing do a better job than municipal bonds at delivering the subsidy to the governments, rather than to high-bracket investors. But ending the bond preference has long been an aim of tax reformers of all stripes. Note, by the way, that the bond interest still wouldn't be taxable - it merely would lose its tax advantage over corporate bonds (leaving aside the tax-indifferent investors point).

By the way, I would love to ask Olson why municipalities would face higher borrowing costs if corporations totally exit the bond market as she predicts. Seems to me that this would be a big boon to the municipalities, wiping out the rest of the supply curve.

As for housing and life insurance, anyone who thinks their relative advantages under current law are economically desirable has a pretty hard case to make.

Again, I don't want to be obnoxious here to an intelligent and nice individual, with whom I have various friends in common, who is just doing her job. But the Olson quotes really ought to alert Democratic/left/liberal foes of the Bush Administration that perhaps the Commission's X-tax proposal (if it really is made) is worth looking at after all.

My biggest concern about the proposal, by the way, is that the form in which a Republican Congress would actually enact it would no doubt be odious. But this is true of any proposal that they might consider while the DeLay-Abramoff-Norquist junta continues to rule. The point of the TRC's work, as I see it, is to set forth options for consideration a few years down the road if the Republicans return to sanity and bipartisan compromise once again becomes possible.

59 comments:

Anonymous said...

"The DeLay-Abramoff-Norquist junta"???

I try to read this for serious tax commentary, not inane political nonsense.

Oh welll, at least there's still Caron and Maule.

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