A Broader Perspective on the Tax Reform Debate

Abstract

The evolution of taxes and government spending will be a primary determinant of whether America remains a successful economy or slides into economic stagnation. The current level of government appears consistent with solid economic growth; a substantially higher tax and spending burden does not appear so.The release of the Report of the President's Advisory Panel on Federal Tax Reform provides an opportunity for a vigorous national debate on taxes and their effect on our economy and society.I present five big-picture tests for tax reform: the likely effects of the reform on economic performance; the size of government; federalism; tax law stability; stable democracy and conclude that we need to keep the hand of government in the economy light; to keep tax rates as low as possible; to prevent tax and spending burdens from growing to those of Western Europe.Since the tax share of GDP is projected to rise by more than one-third in coming decades, we will have to continuously "cut" taxes and spending relative to their projected growth to prevent that large step toward a European style social welfare state. The Panel's proposed tax reforms stabilize federal taxes at the 18% of GDP historical average, by making the Bush tax rate cuts permanent and cutting the top rate slightly more. This is by far the most important aspect of the proposals.Replacing the corporate and personal income taxes with the Panel's Growth and Investment Tax Plan (GIT) or something still closer to a pure flat-rate consumption tax is therefore highly desirable.