Laurence Kotlikoff makes the case that tax reform should consist of abolishing the corporate income tax and replacing the personal income tax with a consumption tax. He characterizes the reasons for resistance against both of these ideas in Washington as a language barrier. I think it’s more than that.
There’s currently a bipartisan consensus in support of our present highly regressive system for three reasons. First, Americans spend hundreds of billions of dollars annually on tax preparation. No one knows exactly how much but it’s clearly in the hundreds of billions. Since one man’s expense is another man’s income, there’s an army of lawyers, accountants, and tax preparation software companies for whom preservation of the current system is quite literally a matter of life and death.
Second, taxing income and the complexity of the present system expands Congressional power. To you and me they’re loopholes. To the Tax Policy Center they’re “tax expenditures”. But to Congress they are the means by which they reward friends, punish enemies, and extract campaign contributions, their political lifeblood. Neither party will forego that power willingly.
Finally, abolishing the most regressive of federal taxes, FICA (the “payroll tax”), is political poison. Whichever party proposes it will be attacked hammer and tongs by the other.
On average we do a major reform of the tax system roughly every twenty years, just about once a generation. The last such major reform was in 1986. We are clearly long overdue but the forces marshalled against reform are very, very strong.
And a wealth tax? Don’t make me laugh. Who do you think the Congress represents and what do you think their Prime Directive is? I think it’s “Thou shalt not tax wealth.”
Don’t forget a fourth reason. Now that Obama has shown that the IRS can be used to punish political opponents with impunity, whichever party holds the White House or expects to will want to use that power in the future. It’s not like anyone (that matters) really objects to that.
Democrats have mastered the static analysis of economic realities.
They figure if there’s income or wealth there, you can tax it.
In the real world, if you tax wealth, it flees overseas. If you tax corporate income, it does too. If you tax consumption, people buy overseas (as the Brazilians do). If you tax entrepeneurs, they build their skypes and missiles for countries that pay inventors and innovators. If you tax income, folks work less. If you tax-favor insurance, folks are more reckless–they drink and breed even more.
If you give tax breaks to marriage and breeding, you get lots of dumb and criminal kids. Same if you tax private schools.
If you give tax breaks to churches and other religious organizations, you get a country ruled by religious superstition.
Hong Kong, the economically freest country on Earth, has figured this out. The USSA has a long way to go.