Tax Wonkery Special Edition

TAX WONKERY SPECIAL EDITION….Mark Schmitt has a very nice, readable article in the current issue of the Monthly about the current state of play on taxes. He believes that just as Proposition 13 and Ronald Reagan ushered in the era of the tax revolt 30 years ago, there’s evidence that the aging of America combined with the fiscal recklessness of George Bush is bringing it to a close:

The truth is that we are heading down a path toward fiscal crisis that will inevitably require a major increase in revenues. In case that sounds like a euphemism, I’ll say it plainly: Taxes must go up.

….If the tax reformers of the future are to make good on the promise of lower rates, as well as surrendering the revenues from the AMT, as well as paying for an aging population, they will have to go well beyond the boundaries of the income tax. And here is where the greatest opportunities for an entirely new political configuration may be found. Conservatives have always been interested in taxing consumption as a way of encouraging savings and investment, and liberals in need of revenue will have no alternative but to reconsider their historical aversion to consumption taxes as regressive.

….While consumption taxes are inherently less fair than a progressive tax on income, there are ways to moderate its unfairness, and if a consumption tax were directly linked to a positive social good — such as a VAT that pays for universal health care — the entire package, taken together, would be enormously progressive.

Sounds good. And as long as we’re thinking big, I’ll toss out one of my favorite outlandish suggestions: why not abolish the corporate income tax as part of this grand bargain? After all, it doesn’t raise all that much money any more (less than 2% of GDP); it’s by far the biggest source of tax complexity we have; it mostly gets passed on to consumers anyway; and it’s the foundation of all corporate welfare. Take away the corporate income tax, and presto! No more tax breaks for special interests. K Street would be decimated.

Consider this deal: The corporate income tax goes away. It’s replaced by a VAT plus an increase in capital gains and dividend taxes to the same level as the tax on income. (Added bonus: the whole “double taxation” argument goes away since corporate profits aren’t taxed in the first place.) And the whole thing is used to fund national healthcare (along with the payroll taxes and general fund revenues that are already dedicated to healthcare). States could be encouraged to follow suit by agreeing to pick up the Medicaid costs of any state that kills its own corporate income tax.

Big business ought to love it. Their income taxes go away, and with it whole platoons of their accounting departments. No more relocating corporate headquarters to Aruba! Healthcare also goes away, which promises to save them both money and hassle. The replacement tax, a VAT, is easy to administer and is directly passed on to customers, much like a sales tax. Every business would be on a level playing field, regardless of size or industry.

Of course, corporate executives wouldn’t much like the idea of higher taxes on investment income. But they’d go along because they make lobbying decisions based on what’s good for the corporation, not what’s good for their own bank accounts, right?


POSTSCRIPT: Since no one else that I know of has ever proposed a deal like this, I assume it’s a dumb idea. But I’d be curious to learn why it’s a dumb idea. If the corporate income tax were responsible for a significant part of the federal budget, I could see why we’d need to keep it. But in fact it’s responsible for no more than a tenth of all federal receipts. So why not kill it and replace it with something better?