The Tax Reform Proposals: Some Good Ideas, but Show Me the Money

Leonard E. Burman and
Leonard E. Burman Institute Fellow - The Urban Institute, Co-founder - Urban-Brookings Tax Policy Center
William G. Gale
William G. Gale The Arjay and Frances Fearing Miller Chair in Federal Economic Policy, Senior Fellow - Economic Studies, Co-Director - Urban-Brookings Tax Policy Center

December 1, 2005

Who can doubt that the U.S. needs a better tax system? We need simple and consistent rules, adequate revenues to finance government spending, equitable tax burdens across and within economic groups, and favorable incentives for productive activity.

On top of these ongoing concerns, we currently need to deal with the imminent explosion of the alternative minimum tax, the looming expiration of all recent tax cuts, and the inconvenient fact that unless we cut future entitlement spending dramatically, we will need to raise substantially more revenue in the future than we have raised in the past.

The President’s Advisory Panel on Federal Tax Reform recently released two plans. The first is the simplified income tax (SIT). The second is a combination of a consumption tax (based on the late David Bradford’s X-tax) and an individual-level surcharge on capital income. Both plans would make tax rules simpler and more consistent, eliminate the AMT, eliminate most tax expenditures, and cut the effective tax rate on capital income. The second plan reduces capital taxes by more than the first does, but both plans combine features of income and consumption taxes.

The plans creatively blend old and new ideas and the overall report has the potential to usefully stretch the boundaries of the public debate and lay the groundwork for future reform discussion.

All of this comes with an enormous caveat, though. The Panel compares its proposals to a tax system that is not based on current law, but rather that starts with current law and then assumes that massive, regressive tax cuts take place. Relative to this straw-man baseline, the Panel claims its proposals would be revenueneutral, distributionally-neutral, and growthenhancing. Relative to the real world, though, the effects likely are far less auspicious.