The Bush Tax Plan: 1

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The Washington Post reports Bush's desire to reform tax policy by the end of 2005 has been pushed back a year. Apparently, with his economists working on killing Social Security as we know it, and the need to cut Bush's highest budget deficit ever in half over the next 4 (or 5) years, while continuing to move the national debt toward the expected 10 Trillion dollars by decades end, there just isn't enough brain power to do taxes as well.

It is just as well. Putting off tax reform reminds me of Arlo Guthrie's joke about Reagan sleeping in the Oval Office. Guthrie said, "the more he sleeps, the safer we are". The more reforms President Bush push's off to the future, the better off we may well be. It appears from the Washington Post article that the Whitehouse has decided to adopt the same strategy as with Social Security, an incremental approach. The big question is, incremental toward what end? The President knows a complete overhaul of the tax system in one piece of legislation, will not pass Congressional muster, which begs the question: Why should the public buy an incremental approach?

There are three approaches to tax reform. One is a regressive tax system that places a large part of the burden on consumers as in the national sales tax proposal. The second is retaining a progressive tax system like the one we have currently (the more you make, the more tax you can afford to pay) which is broke because of inefficiency and loop holes and exceptions and a very high cost to administer. The third is a more neutral system some argue, like the flat tax system.

To date, the President has not ruled out a sales tax approach. Critics of this system cite not only its regressive nature but, its inability to produce additional revenues during economic downturns, since downturns reduce sales. The regressive nature is often debated on the basis that sales tax constitutes a far greater percentage of a poor person's total income than a wealthier person. This is compounded when the wealthy have discretionary income with which to invest and earn interest on, while the working poor have no means to offset the sales taxes they pay on each and every purchase. A sales tax system proposal will endure a tremendous amount of opposition by consumer groups, state's governor's who will see state revenues drop for a time in reaction to vastly increased consumer retail prices, as well as large interest groups supporting the poor and retired living on a fixed income.

The problem with a progressive tax system is that those with the wealth stand to pay more. This in turn gives them incentive to use some of that wealth to hire lawyers, accountants, and even lobbyists to find or create loopholes which will reduce their tax burden. The wealthy are also capable of immense personal influence over politicians who write and pass the tax laws in a very disproportionate representation of their views over less wealthy working persons. One need look no further than the upcoming 80 million dollar inauguration of the President for evidence of their potential disproportionate influence. The costs to the tax payers is large just to defend its tax laws in courts against wealthy litigants both individual and corporate, given the volume of such cases and the additional courtrooms and court staff required, not to mention case preparation, research and investigation. A progressive tax system is arguably the most fair in a nation with wide disparity of incomes and standards of quality of life. But, over time, progressive systems favor the wealthy, become exception riddled, and the tax codes become so voluminous as to render them unenforceable for all intents and purposes, across the board.

The flat tax system too is not without valid critical arguments. First among these is the purist's argument. To be fair, a flat tax must be equally and uniformly applied to everyone. The purists argue if it applies to everyone, it acts as a motivator to all entering the work force to work very hard to increase their salary, which, in turn will increase their net income. Critics argue to do so is inherently unfair. They argue there is a threshold of income under which flat tax should not apply since below that cutoff point of income, the tax serves only to push citizen's into poverty and for some, even out of the work force. Critics of the purist argument argue for a poverty threshold below which the flat tax should not apply.

On the opposite side of the flat tax argument, other critics argue for the flat tax to be assessed on wealth, not income. They argue that the economy and the nation depend upon a wide distribution of wealth sufficient to insure against wide spread poverty and an erosion of the consumerism which is still today, the mainstay of the American economy. The argument goes that America's total wealth is finite, and if wealth distribution through lowering of wages and quality of life standards concentrates into too few hands, the supply of wealth available to consumers to keep productivity up will be threatened as will the economy as a whole. They argue if accumulation of the nation's wealth continues to concentrate into a very small percentage of the population, enterprises will gradually lose customers until one day, large sections of the middle class may find themselves unable to purchase their lifestyle and fall into the lower middle class or under the poverty threshold.

One thing is clear. Any tax system inherently has wealth distribution as one of its cornerstones. A simple example is the military. All citizens pay into the government a portion of their income (or wealth) to pay for national protective services by the military. The beneficiaries of that revenue distribution are the military personnel themselves who are provided jobs and careers and varying degrees of financial security, as well as the host of support companies, corporations, and government agencies personnel who also profit from the redistribution of tax revenues. Only a true anarchist can make the valid argument that all tax systems should be done away with on the basis of their objections to wealth redistribution.

Another cornerstone of any tax system is its promise to produce a net benefit to the stability, continuance, and general welfare of the society as a whole. Proponents of all tax systems argue theirs will reap a greater benefit to our society. However, close scrutiny is required here, since; there is a mathematical certainty to some of the comparisons of net benefit of differing tax systems. There is a finite limit to the nation's wealth.

While that limit may change over time, it always remains finite. Hence, varying tax proposals must be assessed for their impact on which direction it moves the finite limit, up or down. Tax systems which reduce the nation's productivity over protracted periods of time are rightly to be viewed as inferior to other systems that will maintain or increase the nation's productivity. And consumerism is fundamental to productivity. Production must slow if consumer demand drops. Thus taxes can have a dramatic effect upon the nation’s economic health.

The Gross Domestic Product (GDP - the sum of all goods and services produced by a nation) is often referred to as the barometer of the nation's health. If GDP is going up, it is generally agreed the nation is economically healthy. If the GDP is stalling or going down, consensus says the nation's economy is faltering. Tax systems, as well as many other variables, can have a dramatic effect upon GDP. GDP growth usually means increased jobs and upward pressure on wages which is a positive for the nation's work force and their dependents. So, to the extent that tax reform will maintain or increase GDP growth, increases in employer's demand for workers, and increases in worker wages, that tax reform will generally be agreed to be a viable and worthy reform measure. And these will be the ultimate benchmarks by which tax reforms debated by the President and Congress shall be assessed and compared to the current system.

Beware the short term benefits. Like the Titanic approaching the ice berg, an economic system is neither easily, nor quickly, steered. Some proponents of various tax reforms will be making arguments based on short term benefits to GDP or fairness, others on long term benefits, and still others on both the short and long term. But a fair assessment of any tax reform must be measured on its long term effects (meaning decades) upon the economy and its citizens. Tax reform will be one of the most contentious and difficult pieces of legislation to change with any real national consensus. Once done, it will be extremely difficult to undo at a later point as the cost of reform both in the short and long term, economically, and in terms of the legislative process and political capital is high.

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This page contains a single entry by David R. Remer published on December 28, 2004 10:02 PM.

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