Obama Initiates Tax System Overhaul Analysis, 12/10/10

As reported in The New York Times, “Obama Weighs Tax Overhaul in Bid to Address Debt,” 12/10/20, President Obama has asked the Treasury Department to explore tax overhaul options.

The Simpson-Bowles Commission suggested cutting back on credits, deductions and exemptions and thus broadening the tax bases to enable a lower rate to raise revenues. But, this represented more tinkering around the edges of tax reform. The Domenici-Rivlin plan introduces a VAT sales tax dedicated to deficit reduction.

The President’s usage of the word “overhaul” delivers with it the hope that Treasury will be instructed to examine sweeping tax reform including a VAT to make the U.S. more competitive in world trade. The impending Bush tax cut compromise will expand the deficit by an estimated $700-800 billion, and while this additional stimulus may avoid another economic contraction, no one anticipates the economy will grow out of its deficit problem. The increasing debt will have to be addressed with an increase in taxes after the economy begins to turn around, and the best way to do it is with a VAT consumption tax rather than an increase in income taxes.

In the pursuit of simplicity, and not a mere reduction of complexity, tax overhaul analysis should include total replacement of the current tax system: a VAT paired with a flat tax on personal income with a high deductible. Hopefully, Treasury will examine this proposal, once suggested by Herman Kahn, and recently floated again by Gov. Mitch Daniels.

Such a proposal was also at the heart of Gov. Jerry Brown’s presidential campaign in 1991, but Bill Clinton opposed the concept and defined it as a “double tax” which, as a revenue-neutral proposal, it was not. President Clinton now endorses a VAT for the U.S.