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Center for Public Policy Research Hosts Fiscal Trilemma Conference

Can a tax system raise sufficient revenue, promote long run economic growth, and still be fair?

On October 26, 2012 the Center for Public Policy Research hosted a conference titled, “A Fiscal Trilemma?” that aimed to answer the question whether a tax system can raise sufficient revenue, promote long run economic growth, and still be fair? Read the article Growth, fairness and adequate revenue add up to tax policy ‘trilemma’ or click here for more information and press about the conference. Below is an article from by David van den Berg.

Revenue should be raised as part of any broad tax reform package, speakers said at an October 26 tax policy conference in New Orleans.

William Gale, co-director of the Urban-Brookings Tax Policy Center, said a VAT could accomplish that. “In terms of revenue, if Willie Sutton were a public finance economist, he would study the VAT,” Gale said, referring to the 1930s criminal who reportedly said he robbed banks “because that’s where the money is.” “The VAT is where the money is,” Gale added.

Gale said that as a consumption tax, the VAT combines a lump sum tax on all capital with a tax on current and future wages. Gale said that according to his calculations, a 10 percent VAT — with a demogrant given to all households to offset consumption up to the federal poverty line and a fairly broad base as defined by the Congressional Budget Office, and accounting for reductions in other taxes because of the VAT’s creation — would net about 2 percent of GDP in revenue.

However, the country doesn’t have the luxury right now of replacing the income tax with a VAT, as was discussed in the 1990s, Gale said.

“I could see using some of the VAT revenues to reduce aspects of the income tax, but I don’t see how we get rid of the income tax,” he said.

Alan Viard of the American Enterprise Institute said a conventional VAT would not maintain progressivity. He argued for the complete replacement of the income tax with progressive consumption taxation. He suggested that one possible solution could be a hybrid of a personal expenditure tax and an X tax, a type of progressive consumption tax originally devised by the late economist David Bradford under which businesses are taxed on gross receipts minus wages and employees are taxed progressively on those wages.

Political challenges aside, moving to progressive consumption taxation “would completely avoid the income tax’s saving penalty, its distortions across assets, and also the complexities of income accounting,” Viard said. “Now, obviously the different add-on and partial replacement options we’ve seen would have gains of this kind as well, but not as large because they would be partial replacements rather than complete replacements,” he added.

Leonard Burman of Syracuse University proposed something he said doesn’t go as far: earmarking a VAT as a funding source for Medicare and Medicaid programs. That could allow for lowering income tax rates, he said.

“One of the things that made the Tax Reform Act of 1986 work was that there was another source of revenue that could be used to cut individual income tax rates,” he said. “We’re not going to be able to raise corporate income taxes again — arguably we should be cutting those — so this is potentially another source of revenue.”

Tulane University’s Murphy Institute and Department of Economics hosted the conference, which explored tensions between the need for a tax system that would provide enough revenue to deal with long-term budget challenges, promote economic growth in the long term, and be progressive in the face of growing inequality, according to the university’s economics department. Steven Sheffrin, an economics professor at Tulane, said after the conference that there was a lot of interest in consumption taxes expressed at the conference.

“There was obviously very, very strong consensus for a VAT, although personally I’m not sure people thought out all the intergovernmental aspects of that,” Sheffrin said. “I think there was a very broad consensus that a 1986-type tax reform is really not the model now because there is a need for additional revenue.”

Diane Lim Rogers, chief economist at the Concord Coalition, said the federal government should allow the 2001 and 2003 Bush-era tax cuts to expire and work to achieve the same amount of deficit reduction over the 10-year window as would come from the spending cuts and tax increases in the so-called fiscal cliff.

“The only way we’re going to get to economically sustainable deficits is to raise revenues as a share of GDP,” Lim Rogers said. “The problem is nobody wants current-law revenues.”

Lim Rogers said simply letting the 2001-2003 tax cuts expire might be more achievable politically than other tax reform proposals. “I feel like that’s the easiest thing to get done, considering where we’ve been the last decade and the reality of what Congress is in the mood for,” she said.

However, most conference presenters were talking about “first-best solutions,” Lim Rogers said, adding, “These are not ideas I disagree with; it’s just that we are so removed from that first-best world right now.”
Burman said cutting tax expenditures could be a tough sell politically. “There’s a lot of money there, and it’s really hard to figure out how you can get people to give these things up,” he said.

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