Volume 3, Issue 1 - Tax Reform

The evolution of taxes and government spending will be a primary determinant of whether America remains a successful economy or slides into economic stagnation. The current level of government appears consistent with solid economic growth; a substantially higher tax and spending burden does not appear so.The release of the Report of the President's Advisory Panel on Federal Tax Reform provides an opportunity for a vigorous national debate on taxes and their effect on our economy and society.I present five big-picture tests for tax reform: the likely effects of the reform on economic performance; the size of government; federalism; tax law stability; stable democracy and conclude that we need to keep the hand of government in the economy light; to keep tax rates as low as possible; to prevent tax and spending burdens from growing to those of Western Europe.Since the tax share of GDP is projected to rise by more than one-third in coming decades, we will have to continuously "cut" taxes and spending relative to their projected growth to prevent that large step toward a European style social welfare state. The Panel's proposed tax reforms stabilize federal taxes at the 18% of GDP historical average, by making the Bush tax rate cuts permanent and cutting the top rate slightly more. This is by far the most important aspect of the proposals.Replacing the corporate and personal income taxes with the Panel's Growth and Investment Tax Plan (GIT) or something still closer to a pure flat-rate consumption tax is therefore highly desirable.

Michael Graetz assesses the two proposals of the President’s Advisory Panel and finds them lacking and politically infeasible. He proposes moving to a VAT, the Panel's plan “C,” and using the VAT to eliminate the income tax for 150 million Americans. Graetz has an answer to maintain progressivity as well.

Edward Lazear and James Poterba, both members of the President's Advisory Panel on Federal Tax Reform, explain the need for tax reform, and how the Panel's proposals are geared to bring about higher growth, simplification that saves filing time, and fairness.

The President's Advisory Panel on Federal Tax Reform has submitted an important set of proposed structural changes that would generally move the tax system in the right direction. However, at the tax rates the Panel proposes, the plans will not bring in the revenue the U.S. needs.

Alan Auerbach assesses the report of the Presidential Panel on Federal Tax Reform. He finds much good, some bad, and too much missing. Although the reform mission is not yet accomplished he favors Congress pursuing serious tax reform.

In 2011 the federal estate tax is scheduled to revert to its pre-2001 form, with a $1 million exemption and a 55% rate on large estates. Several compromise bills are now under discussion that would raise the exempt amount and lower rates. Although many arguments bear on this decision, the choice ultimately turns on the relative force of two opposing moral principles: a principle of autonomy with respect to the use of one's justly acquired property and a principle of equality with respect to unmerited advantages. We should worry much less about raising the exempt amount than lowering rates.

Robert Hahn and Scott Wallsten in "The Economics of Net Neutrality" overlook the two-sided nature of the broadband market. This has important implications for market power and their proposed remedies.