Our present tax system punishes investment and distorts incentives. A VAT has dangers, but it also holds great promise.
Tax hikes, in one form or another, are simply unavoidable. That’s the blunt message conveyed by Erskine Bowles and Alan Simpson, chairmen of the Obama deficit commission, in their much-ballyhooed portfolio of budget recommendations. Their smartest tax proposals include lowering and simplifying individual-income-tax rates, widening the base by abolishing or capping tax “expenditures” (such as the mortgage-interest deduction) that disproportionately benefit the wealthy, ditching the Alternative Minimum Tax, and trimming the corporate rate while closing loopholes. They also suggest lifting the payroll-tax threshold for Social Security, raising the federal gasoline tax, and dramatically boosting tax rates on capital gains and dividends by treating them as regular income.
Bowles and Simpson deserve lavish praise for their contribution to solving America’s fiscal problems. Yet their tax plan is insufficiently focused on the growth imperative, which reflects a failure of imagination. In the aftermath of a calamitous financial meltdown triggered by a debt-fueled housing binge, tax reform cannot be divorced from the broader structural adjustments necessary to build a more sustainable, investment-oriented economic model.