Is There a VAT in Our Future?
BARTLETT, BRUCE
Is There a VAT in Our Future? The Bush administration is surprisingly full of tax reformers. BY BRUCE BARTLETT WHITE HOUSE officials are hopeful that the signing of George W. Bush's tax cut marks...
...Much more fundamental changes would take place on the business side...
...The commission proposed three options for raising new revenue that could be used to lower property taxes: a gross receipts tax on businesses, an increase in the sales tax, and a VATlike business activities tax...
...Indeed, the common theme in all these tax plans seems to be some sort of VAT on the business side of the tax code...
...The essence of the Nunn-Domeni-ci plan was to eliminate saving from the tax base...
...The next item, they indicate, will be tax reform...
...Because the tax goes directly into the prices of goods, the poor would pay more than they do now...
...In 1997, Bush submitted this third option to the legislature...
...There is less similarity on the individual side of the various plans, but it does appear that all would do something to ease the tax burden on saving and would exempt more people from the income tax...
...Current tax rates would be retained, but the Social Security payroll tax would be cut in half for both individuals and businesses...
...The problem with the VAT, politically, has been that liberals have viewed it as regressive...
...Like Nunn-Domenici, Lind-sey would tax individuals on their gross receipts, including fringe benefits and capital income...
...The business side of the Lindsey plan is very similar to Nunn-Domenici, but without the credit for payroll taxes...
...As a replacement for the corporate income tax, it would be an enormous improvement, because it allows expensing of capital investment and is refunded at the border on exports...
...Only half in jest, former Treasury secretary Larry Summers once said that the United States would adopt a VAT when liberals figure out that it is a money machine and conservatives realize that it taxes the poor...
...However, capital gains and interest would be inflation-adjusted, so that taxes would apply only to real income...
...Virtually all European countries have such a tax, although none has used it to replace other corporate taxes...
...A couple with two children would need to make more than $43,000...
...While the president has yet to offer any clues about what sort of reform he will propose, his appointments to key positions already tell us a great deal...
...This would, by definition, create a consumption-based tax system...
...These include Treasury secretary Paul O'Neill, National Economic Council director Lawrence Lindsey, Council of Economic Advisers chairman R. Glenn Hubbard, and Mark Weinberger, assistant secretary of the Treasury for tax policy...
...Looking at some of the specifics of the tax reform plans previously proposed or endorsed by these officials gives a road map to where the Bush administration may ultimately go on tax reform...
...Only Lindsey proposed a flat tax, the reform that has received most attention in recent years...
...The Alternative Minimum Tax would be repealed and rules regarding foreign-source income greatly simplified...
...The net result of this system would be to maintain the current distribution of the tax burden, while getting saving out of the tax base...
...VAT) in place of the corporate income tax...
...This group raised substantial funds in the corporate community to promote a tax plan proposed by senator Pete Domenici, Republican of New Mexico, and former senator Sam Nunn, Democrat of Georgia...
...However, firms would also receive a tax credit for the employer's share of the payroll tax...
...BY BRUCE BARTLETT WHITE HOUSE officials are hopeful that the signing of George W. Bush's tax cut marks the beginning of their tax agenda, not its completion...
...They note that VAT rates are much more easily raised than income tax rates, and that the VAT's high revenue-raising ability often fuels a vast increase in government spending...
...Businesses would see much more substantial changes under the Hub-bard plan...
...It has the great virtue of being able to raise large revenues at relatively little economic cost and can thus be used to finance individual tax cuts...
...PAUL O'NEILL: While he was chairman of Alcoa, O'Neill co-chaired with Robert Lutz of Chrysler a group called Alliance USA...
...The others would maintain progressive rates...
...Hubbard would also impose a new Business Transfer Tax, a kind of value-added tax, on top of the corporate income tax to pay for the other tax cuts...
...With the personal exemption, a single person would need to make more than $22,000 before paying any income taxes...
...When he became governor in 1995, one of his first acts was to appoint a tax reform commission...
...Given this fact, it would be very surprising if such a tax did not form the basis of any future Bush administration tax reform initiative...
...Lindsey's version is less simple than some flat tax proposals, although it would still be a major improvement over today's tax system...
...Individuals would also get a deduction for saving, capped at $5,000...
...The result would be a very substantial tax cut for many middle-income taxpayers, as well as considerable simplification, with more than half of all tax filers exempted from the income tax...
...On the individual side, the tax base would also start with gross receipts, including wages, interest, dividends, and pensions...
...Danforth-Boren would eliminate the corporate income tax and replace it with a 14.5 percent Business Activities Tax, similar to the type of VAT in the Nunn-Domenici and Lindsey plans...
...MARK WEINBERGER: While on the staff of former senator John Dan-forth, Missouri Republican, Weinberger helped draft a reform plan that his boss cosponsored with former senator David Boren, Oklahoma Democrat...
...Remarkably, every top tax policy official has been associated with a major tax reform proposal...
...Both individuals and businesses would be taxed at the same rate of 19 percent...
...Net receipts would be taxed at a 10 percent rate...
...Nevertheless, it is revealing that his proposal for reforming the Texas tax system relied on a kind of value-added tax for businesses...
...GEORGE W. BUSH: While President Bush has never put forward a plan to reform the federal tax system, he did initiate a tax reform plan in Texas...
...However, taxpayers would get a full deduction for all net saving and investment, as well as deductions for mortgage interest, charitable contributions, and tuition...
...The corporate and individual income taxes would effectively be integrated by allowing corporations a deduction for dividends...
...In the end, the legislature did not support Governor Bush's proposal...
...Firms would be taxed on their gross receipts from domestic sales, less payments to other domestic businesses for goods or services...
...This, its supporters believe, would lead to substantially greater saving and investment, and hence faster economic growth...
...Employee compensation would not be deductible, and all capital equipment would be immediately expensed, not depreciated over a period of years, as is the case now...
...There he devised a tax reform plan that was issued by the Treasury in the waning days of that administration, on December 10, 1992...
...LAWRENCE LINDSEY: In his 1990 book The Growth Experiment, Lindsey lays out a 19 percent flat tax proposal similar to the one long championed by Steve Forbes and House majority leader Dick Armey...
...Foreign sales would thus be excluded and there would be no deduction for foreign purchases...
...But individuals would also receive a tax credit for payroll taxes and a large family living allowance...
...Conservatives have been equally skeptical of a VAT, viewing it as a money machine...
...Its main job was to find a way of reducing high property taxes, and its only constraint was that it could not recommend a personal income tax...
...Deductions for mortgage interest and state and local taxes would be retained, but limited from what is currently allowed...
...On the individual side, Hubbard would keep the existing tax structure, but dramatically raise the standard deduction, to $19,650 for individuals and $33,800 for married couples...
...On the business side, Nunn-Domenici proposed a value-added tax Bruce Bartlett is a senior fellow at the National Center for Policy Analysis...
...Tax rates would start at 19 percent and rise to 40 percent on taxable income above $14,400 for singles and $21,000 for married couples...
...R. GLENN HUBBARD: During the first Bush administration, Hubbard served as deputy assistant secretary of the Treasury for tax analysis...
...There would be a large personal exemption and a limited additional deduction for child care expenses...
...On the individual side, Danforth-Boren would triple the standard deduction...
...Of course, none of the people mentioned above can be held responsible now for proposals they put forward in the past, in different positions and contexts...
...The rate would have been 1.25 percent on gross receipts less payments to suppliers, capital investment, and a $500,000 exemption...
...But it is nonetheless revealing that every Bush administration official with anything to say about tax policy, including the president, is on record as having proposed or supported some sort of value-added tax for businesses...
Vol. 6 • June 2001 • No. 36
