Some taxing ideas (1995) | THINK TANK


Ben Wattenberg: Hello, I’m Ben Wattenberg. Do you hate taxes? Are you tired of the morass of exotic calculations,
impenetrable language, and wasted time? If you had trouble filling out the passive
activity loss limitations form or calculating your bartering income, you are not alone. Several proposals to radically simplify the
tax code are now in play. From the ranks of those seeking major reform,
we are joined today by Michael Boskin, chairman of the Council of Economic Advisers in the
Bush administration and now professor of economics and Hoover senior fellow at Stanford University;
Murray Weidenbaum, chairman of the Council of Economic Advisers in the Reagan administration
and now professor of economics at Washington University in St. Louis; David Bradford, professor
of economics at Princeton University and an adjunct scholar at the American Enterprise
Institute; and Alan Reynolds, director of economic research at the Hudson Institute. The topic before this house: Some taxing ideas. This week on “ThinkTank.” Tax reform fever is sweeping Congress: the
flat tax, the national sales tax, the value-added tax, and the Nunn-Domenici USA tax. Why should we change the current system? The US tax code and regulations are now 17,000
pages long. Taxpayers spend 5.4 billion hours a year preparing
their taxes. Taxes are now so complicated that 57 million
Americans feel it necessary to use a tax preparer. The Internal Revenue Service is swamped. The IRS hires 8,000 employees to answer tax
questions and 29,000 employees to process the forms. In all, the IRS employs 113,000 people, and
the IRS sends out eight billion pages of forms each year. Most of all, American taxpayers feel ripped
off. Reformers offer competing plans to change
the tax system. First up, the flat tax. The most prominent version of this idea reduces
income and business taxes to a flat rate of 17 percent and eliminates all deductions and
loopholes, including the home mortgage deduction. Your tax return under this plan would fit
on a postcard. Second is the national sales tax. It would tax all purchases at a rate of between
20 and 25 percent and would replace the federal income tax completely. Third is the Nunn-Domenici plan. It completely eliminates taxes on savings,
but it keeps progressive tax rates on income that is not saved, much like what we have
today. All right, we are going to take these different
plans one by one. First I’d kind of like to just get a general
sense from the panel about what is wrong with the current system. And if we could just go around the horn once
quickly, starting with you, Michael Boskin. Michael Boskin: Well, Ben, tax rates are way
too high. The tax system is way too complex. In addition to the burden that it places on
taxpayers and the government to collect and comply, the worst part of the tax system is
the huge drag on the growth of the economy. We heavily penalize saving and investment
and other things that contribute to growth. Some of those forms of saving and investment
are doubly or triply taxed. We badly need to get the tax system not only
made simpler so it’s easier to comply with, easier to administer and get rid of all that
five billion extra hours of compliance, but so that it’s less of a drag on the economy’s
growth. Ben Wattenberg: All right. We’re going to come back to that saving
question. David Bradford, please. David Bradford: Ben, it’s hard to beat your
and Michael’s summary. I can’t elaborate much on it. The system is too complicated, it’s not
as fair as it should be, it needs to be radically simplified, made clearer. And definitely that’s within our reach. Ben Wattenberg: Okay. It is within our reach? David Bradford: Oh, definitely. Ben Wattenberg: Alan Reynolds. Alan Reynolds: Same basic idea. High marginal tax rates discouraging savings. They’re discouraging — Ben Wattenberg: Marginal tax rates meaning
— Alan Reynolds: The tax rates on added income. Ben Wattenberg: — the extra dollar you earn. We’re going to try to keep this in American,
right. Alan Reynolds: Okay, the tax rates on additions
to income. Most savings are additions to income, so they’re
extra income, and so they’re taxed at your highest tax bracket, 36, 40 percent, plus
state. Very discouraging. We’re running very short of savings; $200
billion less than investment. We are discouraging work effort. And this can be fixed. We can collect taxes more efficiently, in
ways that allow the economy to grow, and then receipts will grow. Ben Wattenberg: Murray Weidenbaum. Murray Weidenbaum: The challenge is that most
proposals to increase economic growth via tax reform either bring us complication or
reduce the fairness of the system. We need to strive seriously for a comprehensive
tax change that simultaneously strengthens the economy, simplifies the tax burden, and
maintains, maybe even enhances the fairness of the tax system. Ben Wattenberg: All right. Now, let me ask you a question. This whole issue of tax reform has become
very popular at precisely the moment that another issue has become very popular, and
that’s the one we shorthand as anti-government. Now, what I am curious to know is, is this
crazy-quilt tax code driving the anti-government feeling in this country, or do we just — do
you all just want to simplify it because it’s complicated and it can do — do it better,
or are you all here with a hidden agenda that you don’t — because you’re all fairly
conservative, which we’ll talk about in a moment — because you don’t like government? Murray Weidenbaum: I don’t think there’s
any subterfuge. Just speak to anyone on April 15, and you
will get an earful on the complication, the unfairness, the tremendous burden of dealing
with the federal income tax system. David Bradford: I have to say that I come
at this a little differently also, though, Ben. Certainly I would not view this as a subterranean
way to reduce the size of government. Ben Wattenberg: Heaven forbid. David Bradford: But I see this as a massive
regulatory system. It’s like the regulation of the banks or
the regulation of electric utilities or telecommunications. The tax system is a huge regulatory system,
and it has just gotten hugely complicated. I think the biggest problems are not — although
the ordinary citizen on April 15 doesn’t like it, the biggest problems that the tax
code is causing are really in businesses and at the sort of more complex parts of our economy,
where untold sums get spent to try to do it right or to try to avoid tax, either one. And it’s just hugely complicated at the
level of — Michael Boskin: Two quick points because I
think there is a relation. Ben Wattenberg: Between anti-government and
anti-tax? Michael Boskin: Yes. Well, I have no hidden agenda here. I’m here to talk about the tax system, and
obviously you’ve made it clear. I would like to see a smaller government. Just let me make that clear. I think the relation is that increasingly
people feel that their tax dollars are being poorly spent and that the return on their
tax dollar is sent off to Washington. And I think we should think of what the government
spends as the taxpayers’ money. The government has no money. It takes money from the taxpayers etc. And I think that is part of what drives people. In the Eisenhower administration in 1958,
$6 out of every $7 of the much smaller relative size of the federal government went to the
federal government buying goods and services — defense, roads, airports, etc. One out of every $7 went to transfer payments
to somebody else besides the taxpayers. Today that’s reversed, and a majority of
the spending net of interest on the debt is on transfer payments. I think increasingly people are upset about
that disjunction. Ben Wattenberg: Let us take a look at some
of these tax plans specifically. And perhaps, Alan Reynolds, could you describe
briefly the flat tax. Alan Reynolds: The flat tax is basically you
eliminate all deductions and exemptions — or I mean you eliminate all deductions, replace
them with a generous exemption, personal exemption, childhood exemption — bring the rate down
that way. In other words, you’re taxing a broader
— taxing virtually all of your income and you tax it at a lower rate. David Bradford: It has a two-part quality. There’s a tax at the business level, where
most of this complicated stuff takes place, and it is radically simplified. Ben Wattenberg: And it’s a flat tax is 17
percent or whatever for people and companies both. Alan Reynolds: It might be higher. David Bradford: The rate is not so important
here, because that would be determined as you thrashed out what you were trying to do,
but a single rate at the business level. Alan Reynolds: Yes. David Bradford: And then what’s paid out
to workers is then taxed to the workers at the same rate with a large exemption. That’s the basic strategy. Alan Reynolds: So capital is taxed at the
corporate level — the same rate. Labor is taxed at the labor rate. David Bradford: — at the business level. Ben Wattenberg: Now, suppose — it is not
an accident that all of you are conservatives in the broadest sense of the word, because
this — Murray Weidenbaum: It’s fashionable these
days. Ben Wattenberg: It is fashionable, but not
only that, that is where the impetus for this tax reform is coming. What is the objection to the flat tax? Murray Weidenbaum: It’s regressive. That’s the main concern. Ben Wattenberg: That means — regressive? Murray Weidenbaum: Which means, under a regressive
tax, the concern is people with higher incomes pay a smaller proportion of their income in
taxes. People with lower incomes pay a higher proportion. David Bradford: But, Murray, it’s not regressive. Murray Weidenbaum: That’s the concern. David Bradford: It’s just not as progressive
as the present tax is. Murray Weidenbaum: That’s the concern. David Bradford: Yeah, okay, that’s the concern. Murray Weidenbaum: In practice — and here
the proponents of the flat tax are all ambivalent — either it’s flat, which means it’s
proportional, everyone pays the same percent. Ben Wattenberg: If you pay 17 percent, you
pay 17 percent of $50,000 or a half a million dollars or $5 million. Everybody pays the 17 percent. Murray Weidenbaum: That’s right. But they like to also claim it’s progressive. Well, either it’s flat or it’s progressive. Alan Reynolds: Well, no, it’s progressive
up to a point. David Bradford: It is progressive, it is progressive. [Cross talk.] Murray Weidenbaum: Every income tax — David Bradford: It is progressive because
of the exemption. Murray Weidenbaum: Every income tax system
has an exemption at the bottom. David Bradford: That’s part of what makes
it progressive. Murray Weidenbaum: Then by definition, every
income tax system is progressive. Alan Reynolds: They probably all are, actually. Murray Weidenbaum: What makes the tax system
truly progressive is a rate structure, starting at a low rate — Alan Reynolds: I don’t agree with that,
Murray. Murray Weidenbaum: — and going up to a higher
rate. The flat tax is a proportional tax. That’s why we call it a flat tax. Either it’s progressive or it’s flat. Otherwise — (inaudible). David Bradford: Hold on, just a minute. I mean let’s just get it straight. David Bradford: Suppose there were a tax that
was paid only by people who made more than $100,000. No one else paid a penny. Would you regard that as a progressive or
as a regressive tax system? It seems to me that’s how this flat tax
works. Where you start paying the tax makes all the
difference in the world. Murray Weidenbaum: It exempts everyone below
the median income. I mean the exemption’s huge. Michael Boskin: Murray is making the point
that — it’s very important that our viewers understand this. The proposals on the table have this feature
of a large exemption per person. That would be in the Armey plan — for majority
leader Dick Armey. Thirty-five thousand dollars, approximately,
for a family of four, they would pay no income taxes at all. Then if you made $36,000, you’d pay a flat
17 percent on the $1,000 above $35,000. Then if you made $50,000, you’d pay a flat
17 percent on 50 minus the 35, or 15, and so on. So it’s very progressive early on, to the
low-middle income to middle income, then the rate’s flat and the ratio of taxes to income
continues to rise continuously. But when you get out to pretty high incomes,
it flattens out, and it no longer goes up. Ben Wattenberg: Right. So in other words, if you make $10 million,
on the difference between the $36,000 and the $10 million, you’re paying 17 percent
only. Michael Boskin: Right, right. That’s right. Ben Wattenberg: As opposed to 42 or 43 now. So that’s why they say it’s a rip-off
for rich people. Michael Boskin: That, of course, assumes that
there will be no change between the two tax systems. Currently, someone who would be making — would
have a very high income would probably be sheltering a lot more of their income than
they would beat lower rates. They’d be getting low dividends rather than
high-dividend stocks, and it would be changing their behavior in a lot of ways which — they
might be holding municipal bonds. So the difference would be not nearly as great
as comparing the statutory legal rates which apply. For example, there used to be — we had a
90 percent income tax rate back in the 1950s, but almost no income was collected at the
90 percent rate. Ben Wattenberg: All right. Now let’s just move on for a minute to the
next plan that is being discussed, which is the national sales tax. That is part of Sen. Lugar’s campaign for
the presidency. David, that is — you are an expert on that,
I gather. David Bradford: Well, I take it. Yeah, I’ll field it. That is a flat tax. That is really a flat tax, with no exemptions. That’s what Murray is talking about when
he said — that’s a proportional tax, on consumption typically, close to income, but
consumption. Ben Wattenberg: It’s what we now pay as
a state sales tax. David Bradford: Typically it’s the states,
and local governments have them. Most states have them. Ben Wattenberg: And how high would that be? David Bradford: Well, you — I was surprised
at the rate you quoted, actually, 25 percent. Alan Reynolds: That’s much higher than Lugar’s
talking. He’s talking 17. David Bradford: Astonishingly high. Alan Reynolds: Even 17 must be pretty high
— Michael Boskin: Pretty high. Alan Reynolds: — because that’s the rate
in the Armey plan with a big — with a huge exemption. David Bradford: Exactly, so it must be much,
much lower than that. Ben Wattenberg: So roughly, what do you think? Ten to 15 percent, something like that? David Bradford: To be comparable to the 17
percent Armey tax, I would say 12 or 13, probably. Ben Wattenberg: But every time you went out
and bought a tie or a shirt or a pair of eyeglasses, you’d pay it? David Bradford: Well, you — yeah, sure. Sure. Michael Boskin: The important difference here,
the difference between 17 or 25 percent and the 12 percent David just mentioned is primarily
whether services are covered. David Bradford: Yeah, true. True. Michael Boskin: Retail sales primarily occur
— or are paid on goods. They comprise about half of all the consumer
spending in the economy. The other half is on services and not at the
retail level. If you have a very broad-based consumption
tax, you could have a much lower rate, as David has indicated. If it was really on retail sales as defined
by the Commerce Department or as typically used at the state level, the rate would have
to be higher and be in the low 20s. Ben Wattenberg: What does Sen. Lugar’s plan
involve? Is that on services and goods, or just on
goods? Does anybody know? Michael Boskin: To my knowledge, he has not
totally specified it. He has named a modest rate and said this is
what he favors. Alan Reynolds: I think he envisions a comprehensive
base, and there are two ways to handle the problem of low-income people. One is to either exempt — the worst way,
probably, is to exempt certain products, like food eaten at home, medical — pharmaceutical
products. A better way is to rebate it, as we now do
with the earned income tax credit — send them a check. Ben Wattenberg: But the whole idea of a national
sales tax is to do away with the Internal Revenue Service and do away with having to
file a form. And now you’re saying, to get a rebate,
you have to file a form. Alan Reynolds: Only the people who claim to
have a low income. Alan Reynolds: That’s an absolutely legitimate
objection, and they also still have to file for Social Security. I mean there are still some filing requirements,
but they’re pretty simple. Michael Boskin: The reason it’s not a good
idea to exempt food or other things that are considered to be more necessities and consumed
more proportionately by low-income people is not that you want low-income people to
pay, but that it would exempt your food, my food, Alan’s food, Murray’s food, David’s
food — Alan Reynolds: Caviar. Michael Boskin: Caviar. (Laughter.) Millionaire’s steak. Ben Wattenberg: Caviar eaten at home, caviar
eaten at home. Michael Boskin: Millionaire’s food as well. So it’s a very inefficient way to try to
relieve the tax burden on people who are relatively poorly off. Ben Wattenberg: Let me have just a quick — a
very, very brief comment. A variant of the retail sales tax, the national
sales tax, is the value-added tax. Could somebody just explain that very quickly
so we can go on to the last one of these. Murray Weidenbaum: It’s a sophisticated
sales tax. It’s popular in Western Europe for a very
good reason. You had the same item taxed at the manufacturer’s
level, at the wholesaler’s level, at the retailer’s level. Ben Wattenberg: Every time the good changes
hands, there’s a tax cut on it. Murray Weidenbaum: That’s right. And it is a simple legal way of minimizing
the tax: have one big company be the manufacturer, the wholesaler, and the retailer. You don’t want to encourage that kind of
agglomeration of industry just to avoid taxation. Ben Wattenberg: And it’s also hidden politically
from the taxpayer. They don’t see it. David Bradford: Right. Murray Weidenbaum: The best tax is a hidden
tax. So there it — a value-added tax was true
tax reform in Europe. We don’t have a system of what we call cascading,
duplicating national sales taxes, so a value-added tax wouldn’t be reform in that sense. Ben Wattenberg: Michael. Michael Boskin: It’s very important to understand
that when tax reformers are talking about the possibility of a national retail sales
tax or a value-added tax or any other type of consumption levy, they are talking about
it in the context of totally abolishing the corporate and personal income tax and replacing
it with a new tax device. There are many advantages. There are pros and cons to doing that. Nobody on this panel would want to have a
new tax source on top of the existing income tax, to become a money machine for the government,
to finance a big expansion of government, as has happened in Western Europe, where they
added value-added taxes to their income taxes and have much higher taxes and much more government
spending than we do. Ben Wattenberg: Okay. Now, the last specific one we want to discuss
is the Nunn-Domenici USA tax. Murray, I gather you sort of like that one. Can you describe it? Murray Weidenbaum: Yes, I’ve been working
on that with the two senators for some years. The idea is, we have a tax system now that
needlessly depresses the economy, so it’s essential to provide an incentive for people
to save, an incentive for companies to invest those savings. So right off the top — and this is part
of the simplification, it turns out — all your saving is deducted from your taxable
income. It doesn’t matter — you don’t need an
individual retirement account, you don’t need a Keogh account, an SEP, all those complications. You decide how much you want to save, in what
form you want to save. And everything you want to save — that’s
the legal way of reducing your tax bill — everything you save is deductible from your taxable income. Ben Wattenberg: But it is somewhat easier
for a rich person to save than a poor person to save. Murray Weidenbaum: Actually, it turns out
that there are high savers and low savers at every income level. And you want to — yes, you want to encourage
the low-income people to save for that rainy day or for education or for a down payment
on the house. You want to make it easier for them to do
that. Ben Wattenberg: Now, we hear a great deal
about the savings crisis in America, the saving problem, that nationally we are not saving
enough. Why is that a problem? Murray Weidenbaum: For a very basic reason. The money we save is the investment in new
factories, new production equipment, research and development. The savings is the seed corn for economic
growth, for rising employment, for rising living standards, enhanced competitiveness. Ben Wattenberg: Murray, I talk to some business
groups in the course of my normal earning of my livelihood. I do not hear people in business saying, I
cannot get money to build something. Murray Weidenbaum: On the contrary, speak
especially to small- and medium-sized and new businesses, and you will find them very
hard-pressed to get the venture capital. David Bradford: I have a little different
point of view, and a little different than the way Murray describes it. He said what we need to do is provide people
an incentive to save. I actually come at this from a little different
perspective. And that is, I’m not sure I need to provide
people with an incentive to do things. They can do whatever they want. What we now do is we penalize them for saving,
we penalize them. And in my view, whether or not we need more
in the aggregate, the country needs more, it’s not fair to penalize people for saving. That means people who save more bear more
of the tax burden than people who save less, and that’s not fair. Ben Wattenberg: How do we penalize them, David? David Bradford: An income tax, by its nature,
penalizes you for saving, just as Alan described. It puts a second tax on you. You earn that money and then you put it in
the bank and then it comes back in interest, and you pay tax on that interest. And it penalizes you for doing that. Michael Boskin: Worse yet, it can be taxed
three times or more. Let me tell you how. David Bradford: It could be worse. Michael Boskin: You first earn an income and
pay taxes. That’s the first tax. You save some of that income, and suppose
you buy corporate equities, you buy stock with it. The corporation pays a tax. That’s tax two. Then you get some interest or — you get
some dividends or capital gains, and that may be three. So there are some parts of our economy where
savings are taxed three times rather than just twice. Alan Reynolds: There’s a fourth. Michael Boskin: And a fourth tax when you
die, yeah. Murray Weidenbaum: Nunn-Domenici, it’s a
lot more than just the exemption of saving. First of all, it’s innovative because — and
it deals with this investment in human capital, in human beings. It’s the only tax reform that would provide
each family, each individual a tax deduction for college tuition, for advanced vocational
training. So it’s not just a question of encouraging
investment in business; it’s also investment in people. Ben Wattenberg: Alan, you looked pained. Alan Reynolds: Well, Ben, once you’ve gotten
that advanced degree, you will step out of college and be immediately taxed at 40 percent. Plus your employer will pay a steep tax, which
does not now exist because the employer can’t deduct your payroll. So you now have a double tax on labor, which
is not such a good idea either. Human capital — if you want to encourage
me to go to school and get an advanced degree — by the way, I didn’t because the system
was so punitive in those days, then I’m much concerned with the return at the end
of the day, not just my cost upfront. Ben Wattenberg: Is it fair to say that there
is not harmony within the conservative ranks on how we should simplify the tax code? Murray Weidenbaum: I think there is a fundamental
agreement on such principles as we need a tax system that promotes rather than discourages
economic growth. We need to very much simplify the current
burdensome tax system. And we need to maintain fairness in the distribution
of the tax burden. And frankly, that’s the reason I’ve been
so enthusiastic about Nunn-Domenici. I believe it’s the only reform on the table
that meets all three requirements. Michael Boskin: I think there is a serious
issue of how important it is to maintain the exact same distribution of tax burden as we
have now. Most of the redistribution — I mean if there
are big swings that will cause a lot of angst and political problems. Almost all of the redistribution of income
that the government does goes on the spending side, on the transfer payment side of the
budget. The tax system does very, very little redistribution
of income, partly because when rates start to get high, people find other ways to evade
and avoid the tax system. Ben Wattenberg: We are just about out of time. Let me ask one last question and get a very,
very brief answer, which is this. Many of you are associated with the various
politicians who are pushing these notions. In brief, what would you guess is going to
be the resolution of this debate? And it’s got to be real brief. Michael Boskin: I think later this year and
next year, between congressional hearings and the presidential election, there will
be a big public debate, an attempt to build a national consensus around one or another
of the several ways to reach the goals that have been described earlier. I think you’ll see that implemented in 1997. I think it’s too early to tell what type
of reform we’re going to come up with. Ben Wattenberg: David, what do you think is
going to happen? David Bradford: I know it’s dull, but I
have to agree with Michael — except to say this. I’m a great fan of the Nunn-Domenici efforts
and applaud what they’ve done, but my guess is, we’ll end up — we will end up with
something looking like the flat tax. I can see modifications in it, but I think
that has real appeal. Ben Wattenberg: Alan, what’s going to happen? Alan Reynolds: Flat tax. Ben Wattenberg: Okay. Murray Weidenbaum: We’re going to have a
reform of the income tax because the alternative is a tax which will wind up an addition to
the income tax. Ben Wattenberg: Okay, thank you very much
to this very articulate conservative choir here. We will be hearing the liberal point of view
as the months and years go on. So thank you, Michael Boskin, Murray Weidenbaum,
David Bradford, and Alan Reynolds. And thank you. Please send your comments and questions to
New River Media, 1150 17th St., NW, Washington, DC 20036. Or we can be reached via email at [email protected] For “Think Tank,” I’m Ben Wattenberg. Announcer: This has been a production of BJW
Inc., in association with New River Media, which are solely responsible for its content.

1 thought on “Some taxing ideas (1995) | THINK TANK

  • ✊Repeal the 16th Amendment NOW!

    Income taxes are class discrimination as well as burdensome and confusing and leads to government overspending!

    Replace with a primary National Sales Tax IMMEDIATELY!

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