An Alternate Tax Reform Plan

The New America Foundation has just proposed a few ideas for fundamental tax reform. Their tax reform plan suggests five specific major changes to how taxes are collected in the US:

• Replace the payroll tax with a progressive consumption tax, i.e. a tax only on the income that an individual does not save;
• Eliminate corporate income taxes, but tax capital gains and dividends as regular income;
• Simpify tax expenditures, by consolidating and eliminating a myriad of tax deductions, exemptions, and credits into a few consolidated tax credits;
• Replace the estate tax with an inheritance tax;
• Levy new environmental taxes, such as gas taxes or carbon taxes.

I actually like most of these ideas quite a bit. I particularly like the idea of getting rid of the highly regressive payroll tax and simplifying tax expenditures into a few tax credits. Both of these ideas could add substantial progressivity to the tax code.

The corporate income tax is inefficient and unwieldy, and the only reason that I’ve generally been in favor of it is because it is a good way of making effective taxes more progressive, since most corporations are owned primarily by the wealthy. So if the rest of the tax code is made more progressive as part of the bargain (which raising the tax rates on capital gains and dividends would do), I could get behind eliminating the corporate income tax.

Green taxes seem like an excellent idea to me, both from an environmental point of view and from an efficiency point of view, since energy demand is relatively inelastic. They do tend to be slightly regressive, however, and so this should ideally be part of a package including other changes that make taxes more progressive.

Finally, I think that it is a superb idea to completely drop the whole fight over estate taxes, and instead simply levy an inheritance tax.

The specific details and their redistributive effects would have to be worked out, obviously. But assuming that this package of reforms would generally have the effect of making tax collection in the US more progressive (and I think that it probably would, perhaps substantially), this is a set of reforms that I would be happy to see.

Kash