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Some Taxing Ideas

Think Tank Transcripts:Some Taxing Ideas

ANNOUNCER: 'Think Tank' has been madepossible by Amgen, a recipient of the Presidential National Medal ofTechnology. Amgen, bringing better, healthier lives to peopleworldwide through biotechnology.

Additional funding is provided by the John M. Olin Foundation, theRandolph Foundation and the Lynde and Harry Bradley Foundation.

MR. WATTENBERG: Hello, I'm Ben Wattenberg. Do you hate taxes? Areyou tired of the morass of exotic calculations, impenetrable languageand wasted time? If you had trouble filling out the passive activityloss limitations form or calculating your bartering income, you arenot alone. Several proposals to radically simplify the tax code arenow in play.

From the ranks of those seeking major reform, we are joined todayby Michael Boskin, chairman of the Council of Economic Advisers inthe Bush administration and now professor of economics and Hooversenior fellow at Stanford University; Murray Weidenbaum, chairman ofthe Council of Economic Advisers in the Reagan administration and nowprofessor of economics at Washington University in St. Louis; DavidBradford, professor of economics at Princeton University and anadjunct scholar at the American Enterprise Institute; and AlanReynolds, director of economic research at the Hudson Institute.

The topic before the House: Some taxing ideas. This week on 'ThinkTank.'

Tax reform fever is sweeping Congress: the flat tax, the nationalsales tax, the value-added tax, and the Nunn-Domenici USA tax. Whyshould we change the current system?

The U.S. tax code and regulations are now 17,000 pages long.Taxpayers spend 5.4 billion hours a year preparing their taxes. Taxesare now so complicated that 57 million Americans feel it necessary touse a tax preparer.

The Internal Revenue Service is swamped. The IRS hires 8,000employees to answer tax questions and 29,000 employees to process theforms. In all, the IRS employs 113,000 people, and the IRS sends out8 billion pages of forms each year.

Most of all, American taxpayers feel ripped off. Reformers offercompeting plans to change the tax system. First up, the flat tax. Themost prominent version of this idea reduces income and business taxesto a flat rate of 17 percent and eliminates all deductions andloopholes, including the home mortgage deduction. Your tax returnunder this plan would fit on a postcard.

Second is the national sales tax. It would tax all purchases at arate of between 20 and 25 percent, and would replace the federalincome tax completely.

Third is the Nunn-Domenici plan. It completely eliminates taxes onsavings, but it keeps progressive tax rates on income that is notsaved, much like what we have today. All right, we are going to takethese different plans one by one. First I'd kind of like to just geta general sense from the panel about what is wrong with the currentsystem. And if we could just go around the horn once quickly,starting with you, Michael Boskin.

MR. BOSKIN: Well, Ben, tax rates are way too high. The tax systemis way too complex. In addition to the burden that it places ontaxpayers and the government to collect and comply, the worst part ofthe tax system is the huge drag on the growth of the economy. Weheavily penalize saving and investment and other things thatcontribute to growth. Some of those forms of saving and investmentare doubly or triply taxed. We badly need to get the tax system notonly made simpler so it's easier to comply with, easier to administerand get rid all of that 5 billion extra hours of compliance, but sothat it's less of a drag on the economy's growth.

MR. WATTENBERG: All right. We're going to come back to that savingquestion. David Bradford, please.

MR. BRADFORD: Ben, it's hard to beat your and Michael's summary. Ican't elaborate much on it. The system is too complicated, it's notas fair as it should be, it needs to be radically simplified, madeclearer. And definitely that's within our reach.

MR. WATTENBERG: Okay. It is within our reach?

MR. BRADFORD: Oh, definitely.

MR. WATTENBERG: Alan Reynolds.

MR. REYNOLDS: Same basic idea. High marginal tax ratesdiscouraging savings. They're discouraging --

MR. WATTENBERG: Marginal tax rates meaning --

MR. REYNOLDS: The tax rates on added income.

MR. WATTENBERG: -- the extra dollar you earn. We're going to tryto keep this in American, right.

MR. REYNOLDS: Okay, the tax rates on additions to income. Mostsavings are additions to income, so they're extra income, and sothey're taxed at your highest tax bracket, 36, 40 percent, plusstate. Very discouraging. We're running very short of savings, $200billion less than investment. We are discouraging work effort. Andthis can be fixed. We can collect taxes more efficiently, in waysthat allow the economy to grow, and then receipts will grow.

MR. WATTENBERG: Murray Weidenbaum. MR. WEIDENBAUM: The challengeis that most proposals to increase economic growth via tax reformeither bring us complication or reduce the fairness of the system. Weneed to strive seriously for a comprehensive tax change thatsimultaneously strengthens the economy, simplifies the tax burden andmaintains, maybe even enhances the fairness of the tax system.

MR. WATTENBERG: All right. Now, let me ask you a question. Thiswhole issue of tax reform has become very popular at precisely themoment that another issue has become very popular, and that's the onewe shorthand as anti-government.

Now, what I am curious to know is, is this crazy-quilt tax codedriving the anti-government feeling in this country, or do we just --do you all just want to simplify it because it's complicated and itcan do -- do it better, or are you all here with a hidden agenda thatyou don't -- because you're all fairly conservative, which we'll talkabout in a moment -- because you don't like government?

MR. WEIDENBAUM: I don't think there's any subterfuge. Just speakto anyone on April 15th, and you will get an earful on thecomplication, the unfairness, the tremendous burden of dealing withthe federal income tax system.

MR. BRADFORD: I have to say that I come at this a littledifferently also, though, Ben. Certainly I would not view this as asubterranean way to reduce the size of government.

MR. WATTENBERG: Heaven forbid.

MR. BRADFORD: But I see this as a massive regulatory system. It'slike the regulation of the banks or the regulation of electricutilities or telecommunications. The tax system is a huge regulatorysystem, and it has just gotten hugely complicated.

I think the biggest problems are not -- although the ordinarycitizen on April 15th doesn't like it, the biggest problems that thetax code is causing are really in businesses and at the sort of morecomplex parts of our economy, where untold sums get spent to try todo it right or to try to avoid tax, either one. And it's just hugelycomplicated at the level of --

MR. BOSKIN: Two quick points because I think there is a relation.

MR. WATTENBERG: Between anti-government and anti-tax?

MR. BOSKIN: Yes. Well, I have no hidden agenda here. I'm here totalk about the tax system, and obviously you've made it clear. Iwould like to see a smaller government. Just let me make that clear.

I think the relation is that increasingly people feel that theirtax dollars are being poorly spent and that the return on their taxdollar is sent off to Washington. And I think we should think of whatthe government spends as the taxpayers' money. The government has nomoney. It takes money from the taxpayers, et cetera. And I think thatis part of what drives people.

In the Eisenhower administration in 1958, 6 out of every 7 dollarsof the much smaller relative size of the federal government went tothe federal government buying goods and services -- defense, roads,airports, et cetera. One out of every 7 dollars went to transferpayments to somebody else besides the taxpayers. Today that'sreversed, and a majority of the spending net of interest on the debtis on transfer payments.

I think increasingly people are upset about that disjunction.

MR. WATTENBERG: Let us take a look at some of these tax plansspecifically. And perhaps, Alan Reynolds, could you describe brieflythe flat tax.

MR. REYNOLDS: The flat tax is basically you eliminate alldeductions and exemptions -- or I mean you eliminate all deductions,replace them with a generous exemption, personal exemption, childhoodexemption -- bring the rate down that way. In other words, you'retaxing a broader -- taxing virtually all of your income and you taxit at a lower rate.

MR. BRADFORD: It has a two-part quality. There's a tax at thebusiness level, where most of this complicated stuff takes place, andit is radically simplified.

MR. WATTENBERG: And it's a flat tax is 17 percent or whatever forpeople and companies both.

MR. REYNOLDS: It might be higher.

MR. BRADFORD: The rate is not so important here, because thatwould be determined as you thrashed out what you were trying to do,but a single rate at the business level.

MR. REYNOLDS: Yes.

MR. BRADFORD: And then what's paid out to workers is then taxed tothe workers at the same rate with a large exemption. That's the basicstrategy.

MR. REYNOLDS: So capital is taxed at the corporate level -- thesame rate. Labor is taxed at the labor rate. MR. BRADFORD: -- at thebusiness level.

MR. WATTENBERG: Now, suppose -- it is not an accident that all ofyou are conservatives in the broadest sense of the word, because this--

MR. WEIDENBAUM: It's fashionable these days. MR. WATTENBERG: It isfashionable, but not only that, that is where the impetus for thistax reform is coming. What is the objection to the flat tax?

MR. WEIDENBAUM: It's regressive. That's the main concern.

MR. WATTENBERG: That means -- regressive?

MR. WEIDENBAUM: Which means, under a regressive tax, the concernis people with higher incomes pay a smaller proportion of theirincome in taxes. People with lower incomes pay a higher proportion.

MR. BRADFORD: But, Murray, it's not regressive.

MR. WEIDENBAUM: That's the concern.

MR. BRADFORD: It's just not as progressive as the present tax is.

MR. WEIDENBAUM: That's the concern.

MR. BRADFORD: Yeah, okay, that's the concern.

MR. WEIDENBAUM: In practice -- and here the proponents of the flattax are all ambivalent -- either it's flat, which means it'sproportional, everyone pays the same percent.

MR. WATTENBERG: If you pay 17 percent, you pay 17 percent of$50,000 or a half a million dollars or $5 million. Everybody pays the17 percent.

MR. WEIDENBAUM: That's right. But they like to also claim it'sprogressive. Well, either it's flat or it's progressive.

MR. REYNOLDS: Well, no, it's progressive up to a point.

MR. BRADFORD: It is progressive, it is progressive.

(Cross talk.)

MR. WEIDENBAUM: Every income tax --

MR. BRADFORD: It is progressive because of the exemption.

MR. WEIDENBAUM: Every income tax system has an exemption at thebottom.

MR. BRADFORD: That's part of what makes it progressive.

MR. WEIDENBAUM: Then by definition, every income tax system isprogressive.

MR. REYNOLDS: They probably all are, actually.

MR. WEIDENBAUM: What makes the tax system truly progressive is arate structure, starting at a low rate --

MR. REYNOLDS: I don't agree with that, Murray.

MR. WEIDENBAUM: -- and going up to a higher rate. The flat tax isa proportional tax. That's why we call it a flat tax. Either it'sprogressive or it's flat. Otherwise -- (inaudible).

MR. BRADFORD: Hold on, just a minute. I mean let's just get itstraight.

MR. BRADFORD: Suppose there were a tax that was paid only bypeople who made more than $100,000. No one else paid a penny. Wouldyou regard that as a progressive or as a regressive tax system? Itseems to me that's how this flat tax works. Where you start payingthe tax makes all the difference in the world.

MR. WEIDENBAUM: It exempts everyone below the median income. Imean the exemption's huge.

MR. BOSKIN: Murray is making the point that -- it's very importantthat our viewers understand this. The proposals on the table havethis feature of a large exemption per person. That would be in theArmey plan -- for majority leader Dick Armey. Thirty-five thousanddollars, approximately, for a family of four, they would pay noincome taxes at all. Then if you made $36,000, you'd pay a flat 17percent on the $1,000 above $35,000. Then if you made $50,000, you'dpay 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 tomiddle income, then the rate's flat and the ratio of taxes to incomecontinues to rise continuously. But when you get out to pretty highincomes, it flattens out, and it no longer goes up.

MR. WATTENBERG: Right. So in other words, if you make $10 million,on the difference between the $36,000 and the $10 million, you'repaying 17 percent only.

MR. BOSKIN: Right, right. That's right.

MR. WATTENBERG: As opposed to 42 or 43 now. So that's why they sayit's a rip-off for rich people. MR. BOSKIN: That, of course, assumesthat there will be no change between the two tax systems. Currently,someone who would be making -- would have a very high income wouldprobably be sheltering a lot more of their income than they would beat lower rates. They'd be getting low dividends rather thanhigh-dividend stocks, and it would be changing their behavior in alot of ways which -- they might be holding municipal bonds. So thedifference would be not nearly as great as comparing the statutorylegal rates which apply.

For example, there used to be -- we had a 90 percent income taxrate back in the 1950s, but almost no income was collected at the 90percent rate.

MR. WATTENBERG: All right. Now let's just move on for a minute tothe next plan that is being discussed, which is the national salestax. That is part of Senator Lugar's campaign for the presidency.David, that is -- you are an expert on that, I gather.

MR. BRADFORD: Well, I take it. Yeah, I'll field it. That is a flattax. That is really a flat tax, with no exemptions. That's whatMurray is talking about when he said -- that's a proportional tax, onconsumption typically, close to income, but consumption.

MR. WATTENBERG: It's what we now pay as a state sales tax.

MR. BRADFORD: Typically it's the states, and local governmentshave them. Most states have them.

MR. WATTENBERG: And how high would that be?

MR. BRADFORD: Well, you -- I was surprised at the rate you quoted,actually, 25 percent.

MR. REYNOLDS: That's much higher than Lugar's talking. He'stalking 17.

MR. BRADFORD: Astonishingly high.

MR. REYNOLDS: Even 17 must be pretty high --

MR. BOSKIN: Pretty high.

MR. REYNOLDS: -- because that's the rate in the Armey plan with abig -- with a huge exemption.

MR. BRADFORD: Exactly, so it must be much, much lower than that.

MR. WATTENBERG: So roughly, what do you think? 10 to 15 percent,something like that?

MR. BRADFORD: To be comparable to the 17 percent Armey tax, Iwould say 12 or 13, probably.

MR. WATTENBERG: But every time you went out and bought a tie or ashirt or a pair of eyeglasses, you'd pay it?

MR. BRADFORD: Well, you -- yeah, sure. Sure.

MR. BOSKIN: The important difference here, the difference between17 or 25 percent and the 12 percent David just mentioned is primarilywhether services are covered.

MR. BRADFORD: Yeah, true. True.

MR. 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 youhave a very broad-based consumption tax, you could have a much lowerrate, as David has indicated. If it was really on retail sales asdefined by the Commerce Department or as typically used at the statelevel, the rate would have to be higher and be in the low 20s.

MR. WATTENBERG: What does Senator Lugar's plan involve? Is that onservices and goods, or just on goods? Does anybody know?

MR. BOSKIN: To my knowledge, he has not totally specified it. Hehas named a modest rate and said this is what he favors.

MR. REYNOLDS: I think he envisions a comprehensive base, and thereare two ways to handle the problem of low-income people. One is toeither exempt -- the worst way, probably, is to exempt certainproducts, like food eaten at home, medical -- pharmaceuticalproducts. A better way is to rebate it, as we now do with the earnedincome tax credit -- send them a check.

MR. WATTENBERG: But the whole idea of a national sales tax is todo away with the Internal Revenue Service and do away with having tofile a form. And now you're saying, to get a rebate, you have to filea form.

MR. REYNOLDS: Only the people who claim to have a low income.

MR. REYNOLDS: That's an absolutely legitimate objection, and theyalso still have to file for Social Security. I mean there are stillsome filing requirements, but they're pretty simple.

MR. BOSKIN: The reason it's not a good idea to exempt food orother things that are considered to be more necessities and consumedmore proportionately by low-income people is not that you wantlow-income people to pay, but that it would exempt your food, myfood, Alan's food, Murray's food, David's food --

MR. REYNOLDS: Caviar.

MR. BOSKIN: Caviar. (Laughter.) Millionaire's steak.

MR. WATTENBERG: Caviar eaten at home, caviar eaten at home.

MR. BOSKIN: Millionaire's food as well. So it's a very inefficientway to try to relieve the tax burden on people who are relativelypoorly off.

MR. WATTENBERG: Let me have just a quick -- a very, very briefcomment. A variant of the retail sales tax, the national sales tax,is the value-added tax. Could somebody just explain that very quicklyso we can go on to the last one of these.

MR. WEIDENBAUM: It's a sophisticated sales tax. It's popular inWestern Europe for a very good reason. You had the same item taxed atthe manufacturer's level, at the wholesaler's level, at theretailer's level.

MR. WATTENBERG: Every time the good changes hands, there's a taxput on it.

MR. WEIDENBAUM: That's right. And it is a simple legal way ofminimizing the tax: have one big company be the manufacturer, thewholesaler and the retailer. You don't want to encourage that kind ofagglomeration of industry just to avoid taxation.

MR. WATTENBERG: And it's also hidden politically from thetaxpayer. They don't see it.

MR. BRADFORD: Right.

MR. WEIDENBAUM: The best tax is a hidden tax. So there it -- avalue-added tax was true tax reform in Europe. We don't have a systemof what we call cascading, duplicating national sales taxes, so avalue-added tax wouldn't be reform in that sense.

MR. WATTENBERG: Michael.

MR. BOSKIN: It's very important to understand that when taxreformers are talking about the possibility of a national retailsales tax or a value-added tax or any other type of consumption levy,they are talking about it in the context of totally abolishing thecorporate and personal income tax and replacing it with a new taxdevice.

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 ofthe existing income tax, to become a money machine for thegovernment, to finance a big expansion of government, as has happenedin Western Europe, where they added value-added taxes to their incometaxes and have much higher taxes and much more government spendingthan we do.

MR. WATTENBERG: Okay. Now, the last specific one we want todiscuss is the Nunn-Domenici USA tax. Murray, I gather you sort oflike that one. Can you describe it?

MR. WEIDENBAUM: Yes, I've been working on that with the twosenators for some years. The idea is, we have a tax system now thatneedlessly depresses the economy, so it's essential to provide anincentive for people to save, an incentive for companies to investthose savings. So right off the top -- and this is part of thesimplification, it turns out -- all your saving is deducted from yourtaxable income. It doesn't matter -- you don't need an IndividualRetirement Account, you don't need a Keogh account, a SEP, all thosecomplications. You decide how much you want to save, in what form youwant to save. And everything you want to save -- that's the legal wayof reducing your tax bill -- everything you save is deductible fromyour taxable income.

MR. WATTENBERG: But it is somewhat easier for a rich person tosave than a poor person to save.

MR. WEIDENBAUM: Actually, it turns out that there are high saversand low savers at every income level. And you want to -- yes, youwant to encourage the low-income people to save for that rainy day orfor education or for a down payment on the house. You want to make iteasier for them to do that.

MR. WATTENBERG: Now, we hear a great deal about the savings crisisin America, the saving problem, that nationally we are not savingenough. Why is that a problem?

MR. WEIDENBAUM: For a very basic reason. The money we save is theinvestment in new factories, new production equipment, research anddevelopment. The savings is the seed corn for economic growth, forrising employment, for rising living standards, enhancedcompetitiveness.

MR. WATTENBERG: Murray, I talk to some business groups in thecourse of my normal earning of my livelihood. I do not hear people inbusiness saying, I cannot get money to build something.

MR. WEIDENBAUM: On the contrary, speak especially to small andmedium-sized and new businesses, and you will find them veryhard-pressed to get the venture capital.

MR. BRADFORD: I have a little different point of view, and alittle different than the way Murray describes it. He said what weneed to do is provide people an incentive to save. I actually come atthis from a little different perspective.

And that is, I'm not sure I need to provide people with anincentive to do things. They can do whatever they want. What we nowdo 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 whosave more bear more of the tax burden than people who save less, andthat's not fair.

MR. WATTENBERG: How do we penalize them, David?

MR. BRADFORD: An income tax, by its nature, penalizes you forsaving, just as Alan described. It puts a second tax on you. You earnthat money and then you put it in the bank and then it comes back ininterest, and you pay tax on that interest. And it penalizes you fordoing that.

MR. BOSKIN: Worse yet, it can be taxed three times or more. Let metell you how.

MR. BRADFORD: It could be worse.

MR. BOSKIN: You first an income and pay taxes. That's the firsttax. You save some of that income, and suppose you buy corporateequities, you buy stock with it. The corporation pays a tax. That'stax two. Then you get some interest or -- you get some dividends orcapital gains, and that may be three.

So there are some parts of our economy where savings are taxedthree times rather than just twice.

MR. REYNOLDS: There's a fourth.

MR. BOSKIN: And a fourth tax when you die, yeah.

MR. WEIDENBAUM: Nunn-Domenici, it's a lot more than just theexemption of saving. First of all, it's innovative because -- and itdeals with this investment in human capital, in human beings. It'sthe only tax reform that would provide each family, each individual atax 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.

MR. WATTENBERG: Alan, you looked pained.

MR. 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 existbecause the employer can't deduct your payroll. So you now have adouble tax on labor, which is not such a good idea either.

Human capital -- if you want to encourage me to go to school andget an advanced degree -- by the way, I didn't because the system wasso punitive in those days, then I'm much concerned with the return atthe end of the day, not just my cost up front.

MR. WATTENBERG: Is it fair to say that there is not harmony withinthe conservative ranks on how we should simplify the tax code?

MR. WEIDENBAUM: I think there is a fundamental agreement on suchprinciples as we need a tax system that promotes rather thandiscourages economic growth. We need to very much simplify thecurrent burdensome tax system. And we need to maintain fairness inthe distribution of the tax burden.

And frankly, that's the reason I've been so enthusiastic aboutNunn-Domenici. I believe it's the only reform on the table that meetsall three requirements.

MR. BOSKIN: I think there is a serious issue of how important itis to maintain the exact same distribution of tax burden as we havenow. Most of the redistribution -- I mean if there are big swings,that will cause a lot of angst as well as political problems. Almostall of the redistribution of income that the government does goes onon the spending side, on the transfer payment side of the budget. Thetax system does very, very little redistribution of income, partlybecause when rates start to get high, people find other ways to evadeand avoid the tax system.

MR. WATTENBERG: We are just about out of time. Let me ask one lastquestion and get a very, very brief answer, which is this. Many ofyou are associated with the various politicians who are pushing thesenotions. In brief, what would you guess is going to be the resolutionof this debate? And it's got to be real brief.

MR. BOSKIN: I think later this year and next year, betweencongressional hearings and the presidential election, there will be abig public debate, an attempt to build a national consensus aroundone or another of the several ways to reach the goals that have beendescribed earlier. I think you'll see that implemented in 1997. Ithink it's too early to tell what type of reform we're going to comeup with.

MR. WATTENBERG: David, what do you think is going to happen?

MR. 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 effortsand applaud what they've done, but my guess is, we'll end up -- wewill end up with something looking like the flat tax. I can seemodifications in it, but I think that has real appeal.

MR. WATTENBERG: Alan, what's going to happen?

MR. REYNOLDS: Flat tax.

MR. WATTENBERG: Okay.

MR. WEIDENBAUM: We're going to have a reform of the income taxbecause the alternative is a tax which will wind up an addition tothe income tax. MR. WATTENBERG: Okay, thank you very much to thisvery articulate conservative choir here. We will be hearing theliberal 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: NewRiver Media, 1150 17th Street, NW, Suite 1050, Washington, DC, 20036.Or we can be reached via E-mail at thinktv@aol.com.

For 'Think Tank,' I'm Ben Wattenberg.

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