The good old days

When I was younger this is how the Senate worked:

On September 27, 1986, the US Senate voted by a lopsided margin to overhaul the tax code to the benefit of the extremely rich. The act, the second of the two major Reagan tax cuts, was written by Democratic Senator Bill Bradley of New Jersey and Democratic Representative Richard Gephardt of Missouri, and was signed into law by President Ronald Reagan on October 22, 1986. It was the first major alteration in US tax law in 40 years.

The law cut the income tax rate on the wealthiest Americans from 50 to 28 percent, while simultaneously increasing the tax rate on the poorest citizens from 11 percent to 15 percent. Tax brackets were reduced from 15 to four, and the top corporate tax rate was slashed from 46 percent to 34 percent. The law included a bevy of other measures punishing the poor and low-income workers, including abolishing interest deductions for debt on consumer loans such as credit cards and tightly restricting deductions for Individual Retirement Accounts (IRA).

The 74-23 Senate vote saw 33 Democrats vote in favor of the bill, many of them leading liberals, including senators Kerry and Kennedy of Massachusetts, Gore of Tennessee, Leahy of Vermont, Biden of Delaware, Proxmire of Wisconsin, Glenn of Ohio, Moynihan of New York, Lautenberg of New Jersey, and Harkin of Iowa. Only 12 Democrats, together with 11 Republicans voted against the bill, which was championed by the Reagan administration.

How could we recapture the idealism of the 1980s?  This is how:

…we propose an X tax, consisting of a flat-rate firm-level tax on business cash flow and a graduated-rate household tax on wages.  The tax would completely replace the individual and corporate income tax, the estate and gift taxes, and the Unearned Income Medicare Contribution tax slated to take effect in 2013.

This is basically a progressive consumption tax.  The GOP gets the hated personal and corporate income taxes abolished, and GOP gives in on higher revenues and a fairly progressive tax on wage income (and hence consumption.)

I know what people will say; “Look at the bi-partisan vote in 1986.  That was before the US became a banana republic.”  Yes, but one can’t help dreaming that someday our representatives might start actually trying to help the country.

Younger blog readers who rely heavily on the NYT for  information might be under the impression that the 1980s tax cuts for the rich were enacted due to the evil Republicans.  Actually, almost every single developed country cut its top MTR during the 1980s and 1990s.  And liberal Democrats in America also supported the cuts.  The past is another country—you had to be there to understand.

HT:  Tyler Cowen


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31 Responses to “The good old days”

  1. Gravatar of Gozo Rabat Gozo Rabat
    17. June 2012 at 06:32

    BOTH SIDES TO BLAME? OR IS IT “ONE SIDE NOW”?

    Our host writes, “Younger blog readers who rely heavily on the NYT for information might be under the impression that the 1980s tax cuts for the rich were enacted due to the evil Republicans.”
    __________

    It’s always good to have one’s prejudices reined in by actual facts of history. The analysis of the 1986 tax-code changes provides a helpful reality dose.

    But regardless of this history which shows Democratic participation in creating The Mess We’re In, Contemporary Republican are evil in two ways:

    [1] First, to the extent that ideology is a tool that primarily serves to reinforce hypocrisy. It’s the cleaving to self-serving ideology that’s impeding America’s forward momentum.

    [2] Second, by putting ideological integrity ahead of pragmatic compromise, as a de facto political experiment, the Tea Party component of the Republican Party is showing us the hazards of putting our representative democracy in the hands of high-integrity, ideologically pure politicians.
    ____________________

    Generally, no matter how much we Americans may disavow our elected officials, the American people persistently elect the government we deserve. This means that both sides—Left and Right; Conservative and Progressive; Democratic and Republican—usually share blame for the mess we’re in.

    But right now—mostly because of the ideologically driven refusal to participate in the American form of government by compromise—this can’t be pinned on both sides equally. Given Republican behavior (as exemplified by the Frank Luntz “talking points” cited at the 2010 Blair House healthcare summit† and by Leader McConnell’s “highest priority”‡), only one party merits the responsibility right now. As another quotation has it:

    “It’s the Republicans, Stupid!”

    Regards,
    (($; -)}
    Gozo!
    __________
    † Here’s the White House link to that Blair House summit. Anybody wanting to study Republican obstruction in action might want to watch a good portion of this:
    http://www.whitehouse.gov/health-care-meeting/bipartisan-meeting
    __________
    ‡ Here’s the NATIONAL JOURNAL report, from back in 2010, on Republican objectives during the Great Recession:
    http://www.nationaljournal.com/whitehouse/as-mcconnell-raps-obama-again-who-is-the-good-cop–20101104

    GR

  2. Gravatar of Daniel Kuehn Daniel Kuehn
    17. June 2012 at 06:41

    I found this interesting: “Younger blog readers who rely heavily on the NYT for information might be under the impression that the 1980s tax cuts for the rich were enacted due to the evil Republicans. Actually, almost every single developed country cut its top MTR during the 1980s and 1990s. And liberal Democrats in America also supported the cuts. The past is another country—you had to be there to understand.”

    I am a younger blog reader, but I don’t rely heavily on the NYT for information and I was not under this misapprehension about the Reagan cuts – but the funny thing is I know several older liberals (not really that far left though) who are convinced of just this – that the tax cuts were giveaways to the rich by Reagan. And they lived through it. These are intelligent people too. Clearly public partisanship is not a new thing.

  3. Gravatar of Bill Ellis Bill Ellis
    17. June 2012 at 07:24

    Hey Dads…Happy Father’s Day.

  4. Gravatar of Bill Ellis Bill Ellis
    17. June 2012 at 07:33

    In polls Americans have consistently expresses a preference for a divided government. ( 60% +majorities if I remember right ).

    I wonder if we still do? And If we still do…What The Hell ?
    Americans hate gridlock and love a divided government. This does not compute!

    Abolish the Senate. I am not kidding. It is a great Idea. I know it will never happen.

  5. Gravatar of ssumner ssumner
    17. June 2012 at 07:37

    Gozo, I agree that the modern GOP is too rigid.

    Daniel, I stand corrected.

    Bill, Abolish the Senate and the Presidency. Have the majority leader of the House serve as Prime Minister. Have a figurehead head of state, perhaps a popular Hollywood star like Clint Eastwood.

  6. Gravatar of Cedric Cedric
    17. June 2012 at 07:57

    Great post, Scott. One of the big things to keep in mind when discussing tax reformation is the entitlement structure. Tax policy and entitlement policy tend to get made in a vacuum, leading to incredibly high marginal tax rates (net benefits) on the poor who are attempting to escape poverty.

    http://gregmankiw.blogspot.com/2009/11/poverty-trap.html

    I wonder if we combined a progressive consumption tax along with a Friedman-type guaranteed minimum income. Such a policy might:

    (1) End the poverty trap by phasing out subsidies and phasing in taxes at a rate that keeps net-benefit effective marginal tax rates at a level that gives poor folk incentives to keep working.

    (2) Save a ton of money by getting rid of the anti-poverty workers in government (we’d still have to have child protective services, probation officers, etc., but no more housing projects, food stamps, cell phone welfare, transportation welfare, etc.).

    (3) Keep marginal tax rates on the rich low enough to encourage capital formation, which, as Steve Landsburg reminds us, is key to high wages.
    http://www.thebigquestions.com/2012/04/10/the-path-to-prosperity/

    Who turns down that deal?*

    * Ok, I’m being a little Morgan-esque in my optimism here. Maybe we enact a guaranteed minimum income policy, and two months later some idgit blows his money on hookers and blow and starves to death. Then everyone freaks out and we go back to food stamps and slums.

  7. Gravatar of Thomas Sewell Thomas Sewell
    17. June 2012 at 08:02

    Old theory that R. President Reagan and Democratic Congress compromised under:
    Cut and simplify taxes for growth (R. Reagan) and added revenue in exchange for more government spending (D. Congress). Everybody gets what they want. If the government wasn’t divided, the solution would have been different.

    Over time, the D’s decided that if you keep cutting taxes the government patronage spending gets crowded out by government debt. (Ignore that government revenue still went up in the Reagan years and other tax rate “cutting” administrations.)
    Over time, the R’s realized that if you keep spending, private investment gets crowded out by government debt and the government gets bigger, supporting the D’s patronage supporters. (Ignore that the R’s adopted a big spending habit themselves while in control.)

    So of course, the D’s solution now turns out to be raise taxes and keep spending, while the R’s solution turns out to be cut taxes and stop spending. The old tax rates compromise required spending to buy patronage. Now you have some R. idealists in Congress with enough power to block earmarks and other vote buying based on the spending and patronage model.

    So what’s the new compromise available to R’s and D’s that preserves any part of what they want? I don’t see it. The old model is dead because political reality has changed.

    You could suggest that an effective President could still twist arms and work a compromise, but President Obama doesn’t talk to D’s in Congress, let alone the R’s, unless you count press conferences attacking them for voting down his politically-designed proposals almost unanimously.

    Ultimately, the solution to the impasse is going to be the election in November. Until then, a divided government will muddle along. Afterwards, I suppose it will be determined by who shows up to vote in November.

  8. Gravatar of Cedric Cedric
    17. June 2012 at 08:04

    “Have a figurehead head of state, perhaps a popular Hollywood star like Clint Eastwood.”

    BAD. ASS.

    North Korea would free its prisoners in minutes.

  9. Gravatar of Cedric Cedric
    17. June 2012 at 08:09

    Bill, you wrote:

    “Abolish the Senate. I am not kidding. It is a great Idea. I know it will never happen.”

    Why not just repeal the 17th amendment? Drastically reduce the incentive to demagogue and showboat; drastically increase the power of states to help shape federal policy. The Senate would be a place for adults again.

  10. Gravatar of Why Can't Congress and the President Compromise Any Loinger? | Come, Let Us Reason Together Why Can't Congress and the President Compromise Any Loinger? | Come, Let Us Reason Together
    17. June 2012 at 08:10

    [...] R. Reagan Scott Sumner talks about the good old days of President Reagan and Congressional Democrats compromising. [...]

  11. Gravatar of Beckett Beckett
    17. June 2012 at 08:20

    Was Scott trolling a socialist website? haha

  12. Gravatar of Michael Margolis Michael Margolis
    17. June 2012 at 08:47

    The 1986 tax reform was not a redistribution of the burden in favor of the rich — at lease, not in any way so obvious as that Socialist website claimed. It is true the bottom rate was 11% before the reform and 15% after, but that rate was not applied to the same households. Millions were removed from income tax rolls entirely. For example, a family of four earning $10,000 paid at the 11% rate before reform, but even one making $15,000 paid zero after (http://www.jct.gov/jcs-10-87.pdf).

    Then as now, the deductions are mostly used by the rich, so getting rid of them and cutting top marginal rates is not inherently redistributive one way or the other. By design, that reform was distributionally neutral, and my impression is it came pretty close.

    This is such an un-Sumnerian bit of bad history that I can only assume I am failing to get part of the joke hinted at by linking to the Socialists — but I can’t have been the only one.

  13. Gravatar of Michael Margolis Michael Margolis
    17. June 2012 at 08:47

    The 1986 tax reform was not a redistribution of the burden in favor of the rich — at lease, not in any way so obvious as that Socialist website claimed. It is true the bottom rate was 11% before the reform and 15% after, but that rate was not applied to the same households. Millions were removed from income tax rolls entirely. For example, a family of four earning $10,000 paid at the 11% rate before reform, but even one making $15,000 paid zero after (http://www.jct.gov/jcs-10-87.pdf).

    Then as now, the deductions are mostly used by the rich, so getting rid of them and cutting top marginal rates is not inherently redistributive one way or the other. By design, that reform was distributionally neutral, and my impression is it came pretty close.

    This is such an un-Sumnerian bit of bad history that I can only assume I am failing to get part of the joke hinted at by linking to the Socialists — but I can’t have been the only one.

  14. Gravatar of Bonnie Bonnie
    17. June 2012 at 08:51

    The leadership in both houses of congress is messed up. There have been a number of bipartisan proposals to deal with debt and spending floated around in the senate and none of them went any where. I thought the Gang of Six plan to be reasonable and it died the death of a rag baby without even being voted on. It doesn’t really have anything to do ideology as much as it does a sense to hoist ‘em high with their own petard. My guess is that Reid isn’t helping himself very much considering Democrats had control of congress for 2007-2011, with a super majority in 2009-2011; he got what he wanted and now he has to live with it along with the rest of us.

  15. Gravatar of Tomasz Wegrzanowski Tomasz Wegrzanowski
    17. June 2012 at 08:55

    > The GOP gets the hated personal and corporate income taxes abolished, and GOP gives in on higher revenues and a fairly progressive tax on wage income (and hence consumption.)

    Like Republicans care about policy…

    They just got healthcare system designed by Heritage Foundation, Obama is continuing and expanding on policy of Bush government in almost every way (closing Guantanamo changed into having a Kill List), and on pretty much the only issue where policy differs – it took Obama longer to support gay marriage than even Dick Cheney, and it’s not like he’s doing anything about it anyway.

    If Republicans cared about policy, they would’t even run their own candidate in 2012 elections, they’d just endorse Obama.

    The thing is that everything Democrats touch immediately becomes the “socialist” position even if even a few months before the only people pushing for it were the Heritage Foundation.

  16. Gravatar of Bonnie Bonnie
    17. June 2012 at 08:55

    I stated this wrong – sorry:

    “My guess is that Reid isn’t helping himself very much considering Democrats had control of congress for 2007-2011, with a super majority in 2009-2011; he got what he wanted and now he has to live with it along with the rest of us.”

    Replace 2011 with 2010.

  17. Gravatar of Negation of Ideology Negation of Ideology
    17. June 2012 at 12:40

    “It was the first major alteration in US tax law in 40 years.”

    I agree that the 1986 Tax Reform Act was a very good bill. But I’m not sure it proves that we had some golden age of bipartisanship. The reason that bill was so remarkable is because it was so rare. 40 years is a long time.

    25 years from now people will be posting on their blog (or whatever they will post to) about “The good old days” when they were young and everyone was civil and politicians put the country over their party.

  18. Gravatar of Mike Sax Mike Sax
    17. June 2012 at 13:06

    Ok so it was birpartisan, I still hated the bill as it was totaly regressive. I can’t even see one thing in it worth celebrating. It is interesing though that Reagan basicaly faced the same opposition-in party terms-that Obama currently does.

    In the first 6 years Reagan faced a House iwth a large majority and a GOP Senate which is exactly what Obama has had since the “shellacking.”

    And yes by the time this bill was passed it Congress was whlly Democrat.

    I told you before I’m skeptical about a “progressive” consumption tax which you chalked up to my “ignornace” of public finance.

    However I have heard since of a few scenarios where it could be progressive-however no flat tax, and not a sales tax.

    I don’t hate the corporate tax-why should it doesn’t effect me one bit- though obvisouly rich guys never stop whtining about it.

    I do however kind of hate the payroll tax-which is America’s most regressive tax-it’s become much more so since the Reagan-Greenspan-Tip O’neil “fix” for Social Security in 1983. If there were a way to lighten if not abolish the payroll tax for the non-rich I might be interested in this in exchange for this stuff the GOP rich guys love so much so long as it doesn’t give us less revenue which that plan you quoted claims not to do-if it gives more I’d really be interested.

  19. Gravatar of Bill Ellis Bill Ellis
    17. June 2012 at 14:21

    S. Sumner said…”Abolish the Senate and the Presidency. Have the majority leader of the House serve as Prime Minister. Have a figurehead head of state, perhaps a popular Hollywood star like Clint Eastwood.

    Ha!…Count me in.

  20. Gravatar of Bill Ellis Bill Ellis
    17. June 2012 at 15:15

    Cedric,

    I am not sure repealing the 17th amendment would help prevent gridlock. I don’t know why Senators doing the bidding of state legislators would be any more conciliatory towards the opposition. State legislators themselves are famous for disregarding the opposition.
    It would make electing state senators much more interesting though.

    I think abolishing the 17th amendment is more of an issue about increasing States Rights rather than solving the gridlock problem. Me, I am for a much more unitary government, so the idea has zero appeal for me.

    I want responsibility to be very clearly allocated. I am a Hippie-liberal-dem, but if we could shift to a parliamentary system right now…putting the repbs in complete charge of the government… I would do it.
    Who to blame or credit would be obvious. No more “blame game”. If America did not like the results we could throw them all out. (As I believe would happen with the repubs).
    Each side would get to fully implement their experiments. No more one side diluting the other’s agenda until there is hardly ever any significant change at all… and the results would be plain to see.

    But it ain’t gonna happen. The best we can hope for is making the Senate the focus of our gridlock frustrations forcing them to change their rules. Just doing that would be a huge struggle…
    Because…
    Our politicians WANT to be able to always have the opposition to credibly blame. Politicians love to give their camps a “Two minutes hate” It keeps the low information folks (most voters) in their camps loyal.
    The “news” media’s main function has become manufacturing credibility for partisan blame.
    The Repubs are way better at it than my dems, but we are catching up. There was I time when that would have horrified me. But now?..it is what it is.

  21. Gravatar of Bill Ellis Bill Ellis
    17. June 2012 at 15:30

    Bonnie.
    No….A near super majority. Joe Lieberman caucused with them dems, but that was as far as it went. Other wise he was in every way a repub who called himself an indi. When we were looking for just one more vote to get the public option we could not turn to Joe, we looked in vain for Snow.

    Reid did not get everything he wanted from his embarrassingly timid agenda by a long shot. (Obama kept preemptively giving things away)

    The 60% vote requirement to get anything done is a recipe for gridlock.

  22. Gravatar of ssumner ssumner
    17. June 2012 at 16:01

    Cedric, Good comment.

    Thomas, You said;

    “while the R’s solution turns out to be cut taxes and stop spending.”

    The GOP is opposed to spending? When did that happen?

    Beckett and Michael, I like to be “fair and balanced.” No one can claim I don’t favorably quote socialist websites.

    (Obviously their analysis was absurd.)

    Bonnie, Good point.

    Tomasz, Good point.

    Negation, Yes, I tend to see the past through rose tinted glasses.

  23. Gravatar of Morgan Warstler Morgan Warstler
    17. June 2012 at 16:46

    Proper Tax policy:

    1. Start with, unless at war, spending can be more than 19% of govt. revenue – and it has a $16T debt to make up.

    It is crucial to cap spending at a hard %, so that it gets liberals thinking about WHAT TAX POLICY GROWS THE ECONOMY?

    Liberals must be forced to channel their greed for govt. into the best tax and spending policies they can invent.

    Real progressives need to think like public sector entrepreneurs – a had spending limit will help get their mind straight.

    2. Corporate Income Taxes ought to be zero, BUT Corporate expenses that individuals consume – like dinners hotels jets etc – should be counted as consumption.

    Every company should be Uncle Scrooge, but they ought to pay more in salary and let guys decide if they really want to fly Biz Class.

    3. SMB owners should be able to freely move profits from one venture to another.

    4. If there is an income tax, even the poor must pay at least a couple points.

    5. Progressive Consumption Tax – sure.

  24. Gravatar of Jim Glass Jim Glass
    17. June 2012 at 23:35

    25 years from now people will be posting on their blog (or whatever they will post to) about “The good old days” when they were young and everyone was civil…

    Everyone is more civil in politics today than, well, pretty much any other time in history.

    In my own youth: “Hey, hey, LBJ, how many kids did you kill today?” for two years outside the White House … soldiers shooting down students on campus … race riots in inner cities, common … campus riots, protests and closures, more common … domestic (not foreign) terrorists bombing buildings, the Weather Underground, SDS, etc… Spiro Agnew as Nixon’s life insurance policy … etc. etc. etc.

    Go back further looking for a political time more polite than today, all the way to the Founders own time, and find Jefferson using State Department funds to finance calumnious newspapers against Hamilton who was using the Treasury police against Jefferson as they sat in the same cabinet … a sitting Vice President shooting a top political enemy dead then returning to preside over the Senate, business as usual, etc., etc. (Cheney shot that guy by accident, he was a friend, and didn’t kill him!)

    Gallup reports more voters are independent today, saying they will vote for either party depending on the particular issue, than at any time in its fifty years of tracking the number. That is not a polarized electorate, it is the opposite of a polarized electorate. It is a moderate-ized electorate.

    … and politicians put the country over their party.

    Ah, well. Politicians always want to keep their jobs, that never changes.

    And the parties — as opposed to the electorate — have become the most polarized in several decades (not “most ever”, see: Civil War). Even while the majority of voters have moderated.

    This has followed from the elimination of the old “smoke filled room” selection of candidates and move towards direct primary elections. That was started by the Democrats in the late 60s, but was inevitable in an advancing society, and now with the Internet and social media allowing the highly politically motivated to organize ever more effectively at ever less cost, the outside wings of the parties are becoming continually more powerful within the parties.

    In the old smoke-filled rooms the party bosses selected candidates on the basis of who had proven they could get things done for them (for better or worse), not on the basis of ideology. So the Democrats had conservatives and moderate officials, and the Republicans had liberal and moderate ones. With each party having a significant portion that overlapped with the other, it was easier for them to talk to each other and find common ground for deal-making.

    But for better or worse, that picking-by-bosses is gone. It’s been replaced by picking-by-the-outside wings.

    The great moderate majority of the electorate is, about politics, apathetic and unknowing (really shockingly so if you refer to surveys of knowledge). It doesn’t care.

    That leaves the small minorities who are highly invested and extremely motivated about politics, plus now highly organized, to exercise hugely disproportionate influence in the parties relative to their numbers.

    Alas, highly invested and extremely motivated correlates highly with extremely partisan and highly ideological. The result of which is that conservative Democrats and liberal Republicans have been purged. So that former party overlap is no more.

    Thus, while the electorate as a whole is more moderate and polite than ever, the political parties have become more partisan and polarized than in generations.

    It is a lesson about direct democracy.

  25. Gravatar of Joel Fish Joel Fish
    18. June 2012 at 03:03

    @Morgan: “Start with, unless at war, spending can be more than 19% of govt. revenue” I assume the word “not” should be in there some where, in which case, isn’t this a financial incentive to wage and maintain wars? If you are going to allow exceptions to a hard cap, what about exceptions for once-in-a-century-financial-crises? As much as I like forcing a hard cap during normal times (whatever those are), the idea of limiting our options in a crises makes me nervous.

    @Anyone: Under a consumption tax and progressive payroll tax scheme, would capital gains be taxed at all? If not, is there concern that such a scheme would increase wealth inequality between the middle class and the very wealthy?

  26. Gravatar of ssumner ssumner
    18. June 2012 at 08:34

    Jim Glass, Good comment.

    Joel, A consumption tax is equivilent to a wealth tax as wealth is the present value of consumption. I don’t believe progresisve consumption tax would increase inequality, just the opposite.

    Capital gains would not be taxed under a consumption tax, as that would be taxing the same wage income twice.

  27. Gravatar of Mike Sax Mike Sax
    18. June 2012 at 08:44

    “If there is an income tax, even the poor must pay at least a couple points”

    Nope. The poor and middle class already pay too much taxes-the payroll tax is ridiculously regressive with a cap at $10,6000.

    In a better world they wouldn’t.

    As for the progressive consumption tax if it’s doen right it could work-maybe. It can’t bring in less tax revenue than now and it must really be “rogressive” that means the rich pay more not just in absolute terms but proportionally

  28. Gravatar of Major_Freedom Major_Freedom
    18. June 2012 at 08:54

    Mike Sax:

    Nope. The poor and middle class already pay too much taxes-the payroll tax is ridiculously regressive with a cap at $10,6000.

    $10,6000? WOWEE! That’s some major coinage. Ten thousand, 6 thousand dollars!

    Seriously though, ALL taxes on business activity are “regressive.”

    If profits are taxed, then the quantity of investment that goes to capital goods and labor will decline relative to overall spending, and that will reduce the productivity of labor by putting more resources into consumption and fewer into capital goods. The standard of living of wage earners (as well as investors) will be lower.

    Taxing poor people’s employers, makes poor people worse off, just like taxing poor people makes their employers worse off. In a division of labor society where we depend on each other in the production process, hurting those we depend on is just hurting ourselves.

  29. Gravatar of Doug Doug
    19. June 2012 at 12:44

    Commenters are ignoring the real point of interest, which is that the X Tax would be vastly superior to the current hybrid income-consumption tax. Ch. 1 of this (free) book summarizes the X Tax and why it is superior to any income tax we can have in the real world. http://www.aei.org/files/2005/05/09/20050428_book820text.pdf

    Note that many left-wing tax lawyers and economists support the X Tax, it’s not a right wing issue amongst those in the know.

    The best argument for consumption taxation is that it’s administratively superior to an income tax. Real world income taxes have to rely on the realization requirement–taxation of capital gains is delayed until they are realized (e.g. by selling an appreciated stock). This creates much of the complexity in the tax Code, and also necessitates the corporate income tax to prevent corporations from becoming tax-deferred investment portfolios for the rich. A true income tax works on an accrual basis (i.e. it taxes gains whether or not “realized”), and hence the basic framework is messed up from the beginning. Consumption taxes, however, operate on a cash-flow basis, which is much easier to realize in practice.

    Here are some of the things that could be eliminated with the adoption of a progressive consumption tax like the X
    Tax: the corporate income tax, the maddeningly complex depreciation rules (capital goods are expensed), the corporate reorganization rules (also crazy complex), the capital gains rules, including all the rules related to basis, the many rules related to interest, and more. Understanding how big of an improvement this is requires knowledge of tax administration that is usually reserved for tax lawyers and accountants, hence it’s a hard sell to the public. Even most economists do not understand this fundamental point.

    The X Tax is not a silver bullet though. It would not solve the problem of differentiating between personal and business expenses, and most of the tax expenditures extant in the income tax could be enacted under the X Tax as well, among other problems.

  30. Gravatar of Saturos Saturos
    19. June 2012 at 21:31

    Scott, but capital gains sometimes represent an additional source of income over and above the return on saving wage income – think forex traders. I say we subtract the nominal interest rate and then tax capital gains and dividends both at half the rate on labor (because it’s riskier) But of course the corporations tax has to go.

  31. Gravatar of ssumner ssumner
    20. June 2012 at 06:02

    Saturos, If you subtracted the nominal interest rate, measured properly, a capital tax would collect no revenue–as the nominal interest rate is the return on capital.

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