EconLog

Betting Against Tax Reform, 2002-11-27

Democratic economic adviser Robert Shapiro thinks that tax reform is unlikely.

(Incidentally, 'Mindles Dreck' questions Shapiro's claim that previous tax reform failed to increase economic efficiency and growth.)

A clean flat tax with just an initial exemption—so we don't tax low-wage families into poverty—could raise today's revenues with a single 21 percent rate. Preserve depreciation on existing equipment, and the 21 percent rate hops to 23 percent; add back mortgage interest and employer-provided health insurance, and the rate hits 26.5 percent; include charitable deductions, state and local taxes, and the Earned Income Tax Credit, and the necessary rate is 29 percent.

I think that the problem is that the personal income tax is not what most needs reform. The most regressive tax is the payroll tax. The most costly tax in terms of economic distortions in the corporate income tax. Both of those taxes should be abolished and replaced by higher income taxes (preferably by eliminating deductions).

Discussion Question. Presumably, business and conservatives would support eliminating the corporate income tax. Would labor and liberals support eliminating the payroll tax?