Fred Thompson's Tax Plan

Fred Thompson, one of the candidates for the Republican nomination for president, has proposed as his tax plan a proposal for a two-rate (almost flat) tax similar to that introduced by the conservative Republican Study Committee, a House-based group, and similar to a "dual rate income tax" proposal discussed by the Chris Edwards at the Cato Institute in Feb, 2005 in its analysis of Options for Tax Reform. See Marc Santora, Thompson Calls for Option of a Simplified Income Tax, NY Times, Nov. 26, 2007.

The proposal would allow people to choose to continue to pay tax under the current system or to pay tax under a two-rate system--10% on income up to $100,000 on joint returns, 25% on all income exceeding that amount.  Adding an optional system complicates, even if the optional system alone might be simpler, in spite of the fact that proponents of the "option" may claim simplification as a goal.  See, e.g., this posting on the Atlantic.com blog discussing Thompson's proposal as simplifying the tax system.  Along with the dual-rate stsructure, Thompson would repeal the estate tax, repeal the alternative minimum tax, lower corporate rates considerably, permanently extend all the Bush tax cuts, permanent extend more expensing for businesses, and adjust depreciation schedules (presumably providing even more upfront deduction for long-term assets).  All those items are on the conservative right's wish list for a world where businesses rule and government plays hardly any regulatory or institutional role.  They wouldn't be costless--the expected revenue reduction from the proposal is at least in the range of two and a half trillion dollars over ten years (AMT repeal alone costs about a trillion over ten years), though Thompson quibbles with those estimates and claims that tax cuts can almost pay for themselves. 

With those kinds of reductions in revenues, the state would either have to borrow even more to keep funding government activities or cut back.  Since many of those who support flat tax systems without progressive rate structures want lower taxes for upper income taxpayers and less revenues for government in order to shrink government, a reasonable expectation would be that the decision would be to shrink government.  Likely cutbacks would be social security and medicare (and any other program that is labelled an "entitlement" ).  See   Amy Schatz, Thompson Unveils Plan for Flat Tax, Wall St. Journal, Nov. 26, 2007.  And Thompson's office has admitted that it would require reducing Social Security benefits at the outset and reducing the way Social Security increases are calculated (tying to inflation rather than wages). 

Schatz suggests that such a plan wouldn't "play well" with senior citizens.  But if we care about democracy, shouldn't such a plan raise concerns for all of us, not just senior citizens?  It seems to move the "greed is good" syndrome that dominates the US today even further along its path to destroying the progressive consensus built especially during the Roosevelt post-depression period that those who are making it owe a decent measure of support to those who cannot make it (for whatever reason) or who are no longer a part of the system able to benefit directly from wage growth paralleling productivity growth.

Comments

[Jeff]

The flat tax makes far less sense than a national sales tax. A tax at the point of purchase would tax all of the income from the underground economy. Drug dealers would actually pay taxes on reatail purchases they make. Waitresses would pay taxes on tip inomce that is usually under reported. The rich spend more money and they would pay more taxes based on what they spend. With a national sales tax there would be no need to file tax returns. This would free up accountants and businesses to put those human resources to better use. This simple plan makes so much sense......it most likely won't be passed by congress.

[LindaMBeale]

A national sales tax wouldn't in practice end up as simple as you suggest. For one, the rate would have to be terribly high, resulting in a lack of progressivity, if it is an across-the board rate. (The way plans claim a low rate is by doing things tht won't actually be done in any real economy--like counting the government's taxation of its own consumption, having no exempt consumption, having no threshold below which the tax doesn't apply, etc.) Americans have supported progressive taxation since the income tax began, and we should retain that feature because it is in fact one of the most important features if we care about democracy. To have a progressive consumption tax is possible, but only with returns and record keeping that parallel the income tax. The fact is, we can expect almost every single one of the issues that arise with the income tax to make it more complex to arise with a national sales tax--keeping records, substantiating claims, lack of compliance, etc. Transition from an income to a consumption tax also represents a huge problem that would add considerable complication and equity issues, such as whether to grandfather by tracking consumption of pre-taxed income or to retax consumption of pre-taxed income. The lesson is that there is no tax panacea, unless the proponent is in the right-wing group that wants at most proportional taxation (with very little taxation of those at the upper end of the income distribution) or even shrinking of the government by denying it revenues. Neither of the latter represent acceptable alternatives for a progressive society, so taxation will inevitably represent complex issues to arrive at the best system to achieve the many goals. If equity stays at the top of the goals, which I have long argued it should, then the income tax, supplemented by an estate tax, is still the best system.

[Rory]

>>But if we care about democracy, shouldn't such a plan raise concerns for all of us, not just senior citizens?<<

Democracy? I think what you are advocating is socialism.

[LindaMBeale]

You are confusing the economic system and the political system: you are apparently of the view that there can't be issues about democracy as long as there is an aggressive, strong capitalist system.

I am saying otherwise--I agree that there are concerns about democracy in a purely socialist economy, but there are also concerns about democracy in a capitalist economy. Markets in fact need to be tempered, and the economic system needs to take into account issues necessary to the institution of democracy, such as inequality.

That doesn't mean an either-or situation (and frankly, few economics are ever purely one thing or antoher). So no, I don't mean "socialism" instead of "democracy", where I refer to democracy in the text. But I don't think you can have a "pure" free market capitalist economy, either. The institutions of government are terribly important to the institutions of the economy (and vice versa). If the economy gets too out of whack with the political institutions, democracy can rathter too easily downgrade into plutocracy.

[Steve Austin]

What's with all the progressive rate, progressive consensus, progressive society talk? You conflate revenue issues with broader policy issues -- for which the term progressive is subjective -- when there is plenty to hash about just on taxation rate terms. Not all progressive taxation rates are considered politically progressive, and vice versa. One man's retrogress is another woman's progress.

[LindaMBeale]

Progressivity has long been accepted as a hallmark of our tax system and an important fairness concern. It remains strongly supported in surveys of American taxpayers.

While many people mistakenly believe that a "free trade" economic approach inherently protects democracy, there is considerable evidence that counters that idea. In fact, if one allows business enterprises to do what they will without governmental intervention, it is quite likely that the result will harm democracy and hurt the little guys. So while we need to be clear what it is we are talking about, and be careful not to conflate "democracy" with "capitalism", we also need to think deeply about the ramifications of economic systems for political systems.

Progressive is also a term used to describe a political approach that values governmental institutions that reasonably support ordinary individuals and works to ensure a decent standard of living for all. Progressives, like libertarians and other political groups, have thought about those issues for a long time. See the Wikipedia entry on progressivism: http://en.wikipedia.org/wiki/Progressivism. I am obviously using it in that sense when I refer to a "progressive society".

[Steve Austin]

Thank you for clarifying your original post. It shouldn't be remarkable that a reader might impute a connection between the use of 'progressive' in successive paragraphs (and even within the same paragraph in a later comment).

Do you have citations (that you're willing to share) for the claims about strong surveyed-taxpayer support for progressive tax rates? Forgive the skepticism, but it's a natural response to the air of presumption.