PUTTING THE NATIONAL INTEREST FIRST

A few months ago, I advanced my personal “Top 10 Reasons Why America Needs a Consumption Tax” (Comments on the News, March 18, 2008). Most of the reactions were positive, although there was a well founded concern about the potential for overburdening lower-income folks (“regressivity” in tax talk).

Since then, I’ve read 100 Million Unnecessary Returns: A Simple, Fair, and Competitive Tax Plan for the United States by Michael Graetz of Yale Law School. He advances a comprehensive plan for fundamental tax reform, built around a value added tax. As part of the deal, income taxes would be radically simplified so that only the most profitable companies and the highest-earning individuals would have to file – hence, the “100 million unnecessary returns.” In addition, Graetz advances an innovative idea to deal with regressivity -- a “payroll adjustment” or “smart card” (actually, a debit card) to offset the impact of the VAT on lower-incomer workers. His plan is comprehensive and makes eminently good sense in terms of the objectives I had set forth. Moreover, he’s worked out the numbers, so that readers can understand the full implications of his plan.

The book is full of interesting facts and arguments. (For a summary of his plan, go to http://www.iasworldtrade.com/Graetz_Memo.htm and http://www.iasworldtrade.com/Graetz_Chart.htm.) I’d like to highlight just two that seem highly relevant in view of the promises being bandied about in the current presidential campaign.

On the one hand, Graetz – who served in the Treasury Department under Bush 41 -- argues forcefully that a good tax system produces enough revenue to fund the government in normal times. He rightly abhors chronic deficit spending, deriding it as “catnip to politicians” and unfair to future generations who will get stuck with the unpaid bills. He’s not a tax and spend anything. On the contrary, he seeks real fiscal discipline. However, he recognizes that the government has made promises that, under the current system, it cannot keep. So, a combination of sustained fiscal restraint and realistic revenues are needed to lift the burgeoning burden of debt from the pocketbooks of the younger generations while keeping the word of a government to its people.

On the other hand, he attacks “targeted tax cuts” as a needless complication of the tax system that often produces a hodgepodge of incentives rather than a clear-cut policy. He aptly cites health care as an example. Businesses and individuals get a variety of tax incentives to behave one way or another. Yet we have a health care crisis marked by high costs, a mass of uninsured Americans, disgruntled doctors, and competitively disadvantaged businesses. This is a lousy way to make policy, and the national interest easily gets lost in a welter of special deals for targeted groups.

“The kind of comprehensive reform our tax system clearly needs,” writes Graetz, “will require politicians from both parties to put the national interest ahead of the short-run advantage of any particular segment of their supporters.” That’s pretty ambitious. But our system is unfair, costly and inefficient, complex to the point of bewilderment, ineffective as a public policy tool, and poisonous to our performance in international trade. With the AMT fix apparently unfundable and the expiration of the Bush tax cuts looming large for 2010, now is the time to aim high.

Charles Blum