Pledging to produce a comprehensive tax reform package by next year, Senate Finance Chairman Max Baucus sounded the opening bell Tuesday on what he predicted would be a year-long endeavor to collect opinions on how to fashion a bill that would win broad bipartisan support.
In remarks to an inaugural panel of economists called to testify, Baucus professed to have “no preconceived notions or bias” about what shape a reform package should take. “I’m not looking [specifically] at consumption taxes, VAT [value-added taxes] or anything else,” he said.
Rather, he indicated, he is open to any suggestions for replacing the existing tax system that he portrayed as “pretty creaky, that some day is going to collapse of its own weight.” The four experts at the witness table all seemed to concur and generally called for a sweeping shift to consumption taxes not only as way to raise more money to pay for the mounting cost of federal programs but also to cover the loss of revenue from lowering corporate and individual tax rates.
Michael Graetz, a former congressional staffer and current Yale University law professor, said revenues now “are not quite adequate to pay for our current spending and will fall short of producing [the money] to fund our government after the baby boom generation retires and is collecting the benefits of Medicare and Social Security.”
While acknowledging that benefits of such social programs might have to be “reduced somewhat,” Graetz said “it is foolhardy to assume that taxes will not also have to be raised.” And the better way of doing that, he said, would be to eliminate the income tax for 150 million middle- and lower-income taxpayers and adopt some form of VAT.
New York University’s Daniel Shaviro said the complexity of tax laws “needlessly aggravates and complicates the lives of middle income taxpayers.” And he agreed with Sen. Ron Wyden, D-Ore., who has a tax-simplification proposal of his own, that a radical overhaul of the system is warranted.
The IRS recently estimated that citizen compliance with the income tax system is costing about $140 billion a year.
Despite contentions that consumption taxes are inherently regressive, said Robert Carroll, vice president of The Tax Foundation at American University, “Moving toward a consumption tax base and maintaining the progressivity of the [existing] tax system are not mutually exclusive. Progressive tax rates and broadening the base in ways that limit special tax [breaks] for higher income taxpayers while enhancing the benefit for lower income taxpayers is one recipe for a balanced reform.”
If there is anything that might help nudge the process, said Jason Furman, of the Brookings Institution, it is “three major imminent issues” confronting Congress. One is President Bush’s tax cuts, another is the need to halt expansion of the alternative minimum tax, and the other the worldwide trend toward lower corporate tax rates that put U.S. companies at a global disadvantage.
This article appears in the April 19, 2008, edition of NJ Daily.