Charles Krauthammer writes here about his recommendation for putting the country back onto a path toward fiscal solvency. It is based in an idea from economist Martin Feldstein.
Feldstein calculates that his tax reform would yield $2.1 trillion in new revenue over a decade. Now we can cut the pie. Obama wants the government to keep it all. The GOP wants to give it all back to reduce tax rates. Let’s be Solomonic. Divide the revenue in half – 50 percent to the Treasury for reducing debt, 50 percent to the citizenry for reducing rates.
That’s roughly $1 trillion each. Everybody gets something. Republicans unexpectedly get a rate cut, minor but symbolic after having had to swallow the fiscal-cliff rate hike. The country gets the first significant tax reform in a quarter century. Obama gets $1 trillion worth of “balance,” his price for real entitlement reform. And if he turns out to be serious about that, we get the Holy Grail – tax and entitlement reform all at once.
Here in North Carolina, tax reform will soon be front and center for the General Assembly. JLF’s tax reform resources and specific recommendations can be found here.
Ideally North Carolina would replace all of its current tax revenue with a single rate USA tax. This would eliminate the biases against saving and investment and reduce the bias against work effort found in the existing income tax. But realistically that is not likely to happen. The most important reason for this is that the North Carolina state constitution specifies that income tax rates cannot go above 10 percent.9 For legal purposes, the USA tax would still be considered an income tax, not a consumption tax, even though in reality and for purposes of economic analysis it is clearly the latter. This means that, on a revenue-neutral basis, it would be legally impossible for all tax revenues to be replaced by just this tax since to do so would likely require a rate above the constitutional limit. This is why our “first-best” proposal would not replace all of the taxes collected by North Carolina’s state government. Our focus is on eliminating those taxes that especially penalize saving, investment, and economic growth.
Given this, our “first-best” recommendation is to abolish the personal income tax, the sales tax, the corporate income tax, and the estate tax, replacing them all with a single rate USA tax. This would eliminate the most significant biases against productivity in the income tax plus the uneven taxation of purchases as represented in the current sales tax.
