Tax Follies At TNR

You have to wonder. Half to three-quarters of the American public doesn't believe in evolution (depending on how you define it). One out of three Americans thinks the budget deficit can be eliminated (a) by hoping (or praying) that it goes away (8 percent) or (b) by cutting taxes even more (25 percent). Anti-scientific, un-arithmetic thinking seems to be rampant. But has The New Republic gone over to the dark side, too?

In August, a TNR cover story promoted the wacky idea that we should scrap all of the federal government's progressive taxes in favor of a national sales tax. Such an enormous shift in the tax burden away from the rich and onto the poor and the middle class is the linchpin of what authors Larry Kotlikoff and Niall Ferguson call their "holistic" approach to "Social Security reform, health-care reform, and tax reform." Their spending proposals -- which include a pernicious restructuring of Social Security benefits in favor of high earners and a goofy system of personalized health-insurance vouchers -- are hugely defective. But these half-baked schemes are mere window dressing for what they care about most: their radically unfair tax plan.

Boston University economist Kotlikoff is a longtime sales-tax advocate whose work includes a 1993 article on the topic for the libertarian Cato Institute. Scottish-born Ferguson currently teaches history at Harvard University and is a senior fellow at the conservative Hoover Institution. Despite their pedigrees, they do get one thing right: Our country needs much higher taxes to pay for public services.

Indeed, the authors imply that they want to boost federal revenues by almost half. That's quite ambitious (although given their health-insurance plan, it may not be enough). But the way they would achieve this massive tax increase is abominable.

"The federal fiscal system should be moderately progressive," they state as their first principle. By which they mean far less progressive that it is now.

To counter the well-known fact that sales taxes are inherently regressive, Kotlikoff and Ferguson brag that their proposed national sales tax would offer a universal rebate, designed to exempt everyone on their spending up to the poverty line. They fail to mention, however, that our current income tax doesn't tax families with children until they make more than twice the poverty level. So even with the rebates, replacing current federal taxes with a sales tax would add thousands of dollars a year to the taxes of all but the richest Americans. Those at the very top, on the other hand, would get hundreds of thousands of dollars each in annual tax cuts.

Beyond failing the test of fairness, the authors' fiscal arithmetic doesn't add up, either. They claim that at a 33-percent rate, their sales tax would produce revenues equal to 21 percent of the economy. (The existing federal taxes that they implicitly retain, including excise taxes, customs duties, and most of the worker side of the payroll tax, would bring their promised total up to 25 percent of the economy -- versus only 17 percent now.) This, they say, would be enough to replace personal income taxes, corporate income taxes, estate taxes, and the employer side of the payroll tax, plus leave enough to pay for universal health insurance.

But that's a pipe dream. To collect 21 percent of the economy in sales taxes would require a tax rate of about 60 percent -- assuming almost perfect compliance and a preposterously broad tax base that would include, for example, housing, education, and religious services. (Taxing health care wouldn't produce any net revenue because the federal government would be paying for it.)

In addition, state and local sales taxes probably would have to be double what they are now, as few if any states could run their corporate and personal income taxes without the federal government's help. So the total sales-tax rate would have to be close to 75 percent.

At which point, of course, cheating and tax avoidance would be rampant, as would lobbying for sales-tax exemptions. It's odd, for example, that Kotlikoff and Ferguson think it's plausible that the public would tolerate an extremely high-rate sales tax on home purchases when our current income tax actually subsidizes mortgage payments.

Kotlikoff and Ferguson maintain that their "new New Deal represents the best chance of the Democrats getting back into power." It's hard to believe that they really favor that goal. But even if they do, given how badly the national-sales-tax idea played for Republicans in the 2004 elections, their political advice is worse than their economics.

As for TNR, let's hope publishing this awful piece was only a momentary lapse.

Robert S. McIntyre is the director of Citizens for Tax Justice.

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