As I read Laurence Kotlikoff’s comparison of the Trump tax reform outline with the Republicans in the House’s “Better Way” tax reform bill in the Wall Street Journal, it impressed on me once again what a complicated country the United States is. If the House’s plan becomes law, here’s Dr. Kotlikoff’s description of what will happen to the business income tax:
The Better Way plan transforms the corporate income tax into something different: a business cash-flow tax with a border adjustment. Notwithstanding innumerable mischaracterizations by the press, politicians and business leaders, the cash-flow tax implements a standard value-added tax, plus a subsidy to wages. Every developed country has a VAT, which is an indirect way to tax consumption. All of these levies have border adjustments, which ensure that domestic consumption by domestic residents is taxed whether the goods in question are produced at home or imported. Unlike the Better Way, Mr. Trump’s plan does not include a border adjustment, which means it effectively taxes exports and subsidizes imports. This undermines his goal of reducing the U.S. trade deficit.
Where is the progressive element to the cash-flow tax? It’s in the subsidy to wages, which insulates workers from the brunt of the VAT. They will pay VAT consumption taxes when they spend their paychecks, but they also will have higher wages thanks to the subsidy. The folks who truly pay the cash-flow tax are the rich, because they pay the VAT when they spend wealth that was earned years or decades ago.
So, let’s look at the scorecard. If enacted the United States will have a VAT (the new business border-adjusted cash flow tax), a graduated income tax (the personal income tax), and a flat tax (the payroll tax, at least it would be flat if FICA max were also eliminated as Dr. Kotlikoff mentions).
That’s reminiscent of our health care system. We have a private insurance system, a publicly-subsidized health care insurance system (the health care exchanges), the largest single-payer insurance system in the world (Medicare), and the largest fully socialized health care system in the world (the VA).
Of France Charles De Gaulle once quipped “How can you govern a country with 246 varieties of cheese?” France ain’t got nothing on the U. S.
