HAT Manifesto Part 1/3 - Rubric Cube - 241201 revision

 

Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed.

PART 4 The Economics of the Public Sector

Chapter 12 of 36 The Design of the Tax System

Section 22 of 23

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The President’s Advisory Panel On Tax Reform of 2005

Part 2 of 2

Q: What specifically do you propose?

A: The Tax Panel endorses two reform proposals, both would

· simplify the tax code

· improve economic growth

· roughly preserve the current distribution of tax burdens

· repeal the individual and corporate Alternative Minimum Tax

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The first reform proposal is the Simplified Income Tax, which

· preserves the income tax framework but cuts marginal rates to 15%, 25% and 33%

· provides for a large amount of tax-free saving

· consolidates tax credits

· rationalizes the system of business taxation

The second reform proposal is the Growth and Investment Tax, which

· builds on the Simplified Income Tax system

· allows full expensing of capital

· shifts the tax system toward a consumption tax base

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Productivity growth depends on investment in human and physical capital.

Investment in human capital means acquiring skills through formal education and learning on the job.

Investment in physical capital means adding to the stock of plant, equipment, technological know-how and other intangibles that make workers more productive.

Both proposals encourage investment in skills by reducing marginal tax rates on labor supply for most earners.

They encourage investment in physical capital by reducing taxes on business investment.

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Treasury estimates moving from the current tax structure to the Growth and Investment Tax would lower the average tax burden on all investment from 17% to 6%

This would encourage new investment and significantly increase productivity and wage growth.

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Q: How do these proposals reduce tax rates without reducing tax revenue?

A: Both plans

· trim many deductions that currently narrow the income tax base, deductions often mostly help taxpayers in higher tax brackets

· retain incentives for charitable giving, home ownership and the purchase of health insurance

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Employer-provided health insurance is currently untaxed regardless of its cost this encourages the purchase of excessively generous insurance policies in lieu of paying fully taxable higher wages.

To preserve incentives for employers to provide families with basic insurance coverage both plans tax employer-provided health insurance but only on the amount of insurance valued at more than $11,500 for a married couple and $5,000 for an individual.

Both plans eliminate the federal tax deduction for payments of state and local income and property taxes.

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Q: How about vertical equity?

A: The plans leave the burden of paying for government virtually unchanged.

There is a very slight increase in the burden carried by the rich.

The standard of living of this group and everyone would rise in the long run as a result of the plans' favorable effects on long-term economic growth.

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From article The Bush Tax Reform Panel, Ten Years Later. Tax Foundation. November 2, 2015.

Perhaps the most significant aspect of the reform proposals is they garnered unanimous support from Democratic and Republican members of the Bush Panel.

Today, while there is significant bipartisan consensus for the need for tax reform, it is less frequent that leaders of both parties actually coalesce around a specific tax reform plan.

Although the 2005 reform proposals were not enacted the Bush tax reform panel was an important moment in recent tax policy history, because it provided one possible roadmap for a bipartisan tax reform agreement in the future.

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a very slight increase

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