Event at AEI on Friday to Address Fundamental Tax Reform; What Would the Candidates Say?

October 23, 2008

Tomorrow at AEI, the Tax Foundation and AEI are jointly hosting an event that takes a look at the issue of progressive consumption taxes. The Tax Foundation's Bob Carroll will be a discussant, as will Tax Policy Center's Len Burman. Burman has a new tax reform proposal that is rather bold, but would move the tax code in the direction that it needs (broader tax base and lower marginal rates). Here are some of Burman's tax reform's main features courtesy of the outline here:

The tax reform package combines a VAT dedicated to paying for health care with individual and corporate income tax cuts including lower rates and a broader base (and elimination of the AMT).

The income tax reforms would broaden the tax base, lower tax rates, and eliminate the AMT.

There would be two individual income tax rates: 15 percent and 25 percent. Most taxpayers would be in the 15-percent bracket. The corporate tax rate would be set equal to the top individual income tax rate.

The mortgage interest and IRA deductions would be replaced with an automatic 15-percent credit paid to taxpayers based on information returns filed by financial institutions. The deduction for charitable contributions would be replaced by a matching grant paid directly to qualifying nonprofits. (Taxpayers in the 25-percent bracket could still claim a deduction, but they would add the automatic subsidies to their taxes due.) The deductibility for state and local taxes and exclusion for employer-sponsored insurance would be eliminated. Education tax incentives would be replaced with expanded Pell grants and subsidized student loans.

The child tax credit, the child-related portion of the earned income tax credit, the adoption tax credit, and the child and dependent care tax credit would be replaced by a $2,000 per child fully refundable tax credit. The work subsidy in the EITC would be replaced with a 30-percent refundable payroll tax credit on the first $10,000 of earnings for each adult worker. For those not required to file, credits would be paid in advance through employers or deposited into "smart card" by IRS after information returns are processed.

Most tax scholars on both the right and left would say that such a reform is the type of direction we should be headed in. But given the rhetoric that has been spouted on the campaign trail for the past few months on tax policy, could you imagine the half-truth filled attacks that would be leveled at presidential candidate Burman if he were a candidate that proposed such a plan? I think the ad would go something like this:

Did you know that Len Burman wants to tax your health insurance for the first time ever?

Did you know that Len Burman favors socialist policies that would give welfare to those who pay no taxes?

Did you know that Len Burman wants to give big corporations huge tax breaks, some of which ship American jobs overseas?

Did you know that at a time when housing prices continue to plunge pushing the U.S. into financial turmoil, Len Burman wants to take away your mortgage interest deduction and your ability to deduct those high property taxes you are paying?

Did you know that Len Burman wants to eliminate tax credits for hard-working Americans like you that are struggling to afford the ever-rising costs of college tuition?

Did you know that Len Burman favors taxing your electricity and raising the price you pay at the pump?

That's not the kind of reform we need. I'll fight Washington insiders like Burman who are out of touch with main street America. I promise cutting taxes for families like yours who can't afford the higher taxes you'll be paying under my opponent's plan? I'm John McBama and I approve this message.


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