The Report of the President's Advisory Panel on Federal Tax Reform: A Critical Assessment and a Proposal

Abstract

On November 1, 2005, The President's Advisory Panel on Federal Tax Reform submitted its report to the Secretary of the Treasury. At 272 pages, this is the most important and wide-ranging plan to reform the U.S. federal tax system since Blueprints for Basic Tax Reform (1977). While prospects for immediate action appear dim, the Report will no doubt be the basis of discussion of federal tax reform for a long time to come. This paper attempts a preliminary evaluation of the Report. It first tries to situate the Report in the context of the long-lasting debate about whether income or consumption should be the proper tax base, and to explain why neither of the two plans endorsed by the Panel (the Simplified Income Tax (SIT) Plan, and the Growth and Investment Tax (GIT) Plan) completely abandons income taxation. Second, the paper evaluates each of the SIT and GIT Plans and points out some problem areas in each proposal. Finally, the paper advances an alternative proposal that abandons the political constraint imposed by President Bush (revenue neutrality) and calls for part of both the SIT and GIT Plans to be enacted. Specifically, the paper calls for enactment of the individual part of both Plans, which is identical; for adoption of the taxation of income from savings proposal in the GIT Plan (although not necessarily at the same rate); and for enactment (with minor modifications) of the business tax portion of both Plans. The result would be that the U.S. would end up with a simplified income tax for individuals (the individual and savings part), a corporate tax (the business part of the SIT Plan), and a VAT (the business part of the GIT Plan). This reform would align U.S. tax policy with the other members of the OECD (all of whom have personal and corporate income taxes and a VAT) and (unlike the Panel proposals and other revenue neutral options) would enable it to meet the long-term budgetary implications of the retirement and health insurance needs of the baby boom generation.