Policy Debate: How should we reform the current tax system?

That the power to tax involves the power to destroy ...[is] not to be denied.
~ U.S. Supreme Court Justice John Marshall in McCulloch v. Maryland, March 6, 1819.

Arguments for tax reform have existed as long as governments have collected taxes. The current U.S. federal tax structure is criticized because it is perceived as:

• being excessively complex,
• providing too little incentive to save,
• generating labor supply disincentive effects, and as
• being unfair.

In constructing a system of taxes, an "equity-efficiency" tradeoff often appears. Attempts to make economic outcomes more equitable through the use of taxes often provides disincentive effects that reduce the overall level of economic efficiency. A classroom analogy is often used to illustrate this tradeoff. Suppose that all students in a class of 300 students are told that they will all receive a test grade equal to the average grade on the test. This outcome is "equitable" in the sense that everyone receives the same grade. It is not an efficient outcome, however, in that it provides an incentive structure that encourages students to study less (since each student realizes that their individual performance has little substantial effect on their test grade). Attempts to provide more equal incomes through a tax system will typically reduce the incentive to work or save.

Societies want both increased equity and increased efficiency. Unfortunately, many tax reforms designed to improve equity reduce efficiency, and vice versa.

In reading through the tax reform proposals listed below, consider the effects of each on equity and economic efficiency.

• Congressional Budget Office, "The Economic Effects of Comprehensive Tax Reform," July 1997
  http://www.cbo.gov/showdoc.cfm?index=36&sequence=0&from=1
  This document, provided by the Congressional Budget Office provides an overview of the economic consequences of alternative tax reform proposals.

• Internal Revenue Service
  http://www.irs.ustreas.gov/
  The U.S. Internal Revenue Service home page contains extensive information about the U.S. federal income tax system. Included at this site are recent and historical tax and income statistics that can be downloaded in standard spreadsheet formats. Information on the tax code may be found here as well as downloadable tax forms and instructions.

• U.S. Tax Code
  http://www.fourmilab.ch/ustax/ustax.html
  This site, provided by John Walker, provides an online searchable version of the U.S. Tax Code. Walker converted the January 1994 version of the U.S. tax code into a hypertext document. If nothing else, this site is worth visiting to understand the complexity of the U.S. federal tax structure. A text version of the U.S. Tax Code is over 21 megabytes in size!

• The Tax History Museum
  http://www.tax.org/museum/default.htm
  This site contains a wealth of information on the evolution of the U.S. federal tax system. Tables and graphs are provided that illustrate the evolution of the federal tax system. Copies of cartoons and World War II propaganda posters relating to federal taxes are also available at this location.

• Adam Smith's Recommendations on Taxation
  http://www.progress.org/banneker/adam.html
  Nadia Weiner, the Director of the Adam Smith Club of Sydney, Australia, contains excerpts from Adam Smith's writings on tax policy.

• Federal Income Tax "Receipt"
  http://www.highcaliber.com/ibotax99/taxwelc99.html
  The Independent Budget Office of New York City provides this online calculator that provides a breakdown of how your 1999 federal tax payments were spent (have your most 1999 1040 form handy when you visit). While this is not exactly a "tax reform" site, it does provide useful information about how your current taxes are being spent. (Tax information for NY State and the city of NY is also available here.)

• Kiplinger, "Marriage Tax Penalty (or Bonus) Calculator"
  http://www.kiplinger.com/tools/marriage.html
  This page, provided by Kiplinger, provides an online calculator that allows visitors to input their own and their spouse's earnings to determine whether they would pay more or less as single individuals.

• Dr. Quiggly's Museum of Tax Oddities
  http://www.progress.org/banneker/museum.html
  This site provides an interesting collection of examples of the effect of taxes on behavior. Examples from earlier time periods appear in The Hall of Ancient Relics.

• Shahira ElBogdady, "The Inefficiency of Targeted Tax Policies"
  http://www.house.gov/jec/fiscal/tx-grwth/targets.htm
  In this conservative critique of President Clinton's 1998 budget proposal, Shahira ElBogdady argues that targeted tax cuts distort relative prices and interfere with the efficient operation of markets. It is suggested that broad-based tax reductions that minimize loopholes would be preferable.

• James K. Glassman, "Forget Trying to Design a Good Internet Tax"
  http://www.reason.com/tcs/050800.html
  James K. Glassman, in this May 8, 2000 Reason Online article, argues that Congress should abandon efforts to tax online sales. He notes that such taxes would be relatively easy to avoid and costly to enforce, while hindering the development of e-commerce. Such taxes are also highly regressive. Glassman argues further that state sales taxes should be eliminated on all sales.

• House Majority Leader Dick Armey, "Flat Tax - Not Just a Distant Dream"
  http://flattax.house.gov/armey/article/insight.asp
  Congressman Dick Armey is an author of one of the flat tax bills that have been proposed during the past few years. In this online document, Armey presents several arguments in favor of replacing the current income tax system with a flat tax.

• House Majority Leader Dick Armey's Flat Tax proposal
  http://flattax.house.gov/
  This site contains a description of the most recent version of Congressman Armey's Flat Tax proposal. It also has a wide variety of links to articles and speeches that have been delivered by Armey in support of this proposal. Included on this page is a flat-tax calculator that allows visitors to compute their taxes under the proposed tax structure. More arguments in support of this flat-tax structure may be found on the home page of Americans for Tax Reform, a lobby group that supports this proposal.

• A Debate on the Flat Tax
  http://www.aei.org/cs/cs6388.htm
  This page contains an edited transcript of a February 29, 1996 debate between Richard A. Gephardt and Jack Kemp at the American Enterprise Institute.

• Robert S. McIntyre, "Flat Wrong"
  http://www.ctj.org/html/flatwrng.htm
  In this liberal response to the flat-tax proposal, Robert S. McIntyre argues that the Republican proposals for a flat tax would reduce the tax burden on wealthy households while increasing taxes on the middle class. As McIntyre states this, "virtually any flat-rate tax plan that adds up must, by simple arithmetic, produce huge tax cuts for those with the highest incomes and therefore big tax increases on almost everyone else."

• Robert J. Shapiro, "Why Fairness Matters: Progressive Versus Flat Taxes"
  http://www.ppionline.org/documents/Pfflat.pdf
  In this article, Robert J. Shapiro, the vice president of the Progressive Policy Institute, contrasts some of the major recent proposals for tax reform. Shapiro suggests that tax reform proposals should be evaluated according to three criteria: simplicity, equality, and growth. He argues that the flat-tax proposals do not meet these criteria. (To view this document, the Adobe acrobat viewer plugin is required. You may download this viewer by clicking here.)

• Michael R. McEvoy, Esq., "Congress Should Aim to Phase Out the Phaseouts"
  http://www.hsetax.com/HSENews/021696.htm
  In this article, Michael R. McEvoy discussed the use of "phaseouts" in the U.S. tax structure. Phaseouts are reductions in the amount of tax exemptions that may be used as an individual's income rises. These phaseouts are designed to improve the equity of the tax structure by reducing tax benefits for the wealthy. McEvoy argues that these phaseouts are inappropriate because they:
  • represent a "hidden" tax increase,
  • make the tax structure more complex (making tax planning more difficult for individuals), and
  • result in a tax structure that is less progressive at the highest levels of income.

• American Council for Capital Formation, "Tax and Regulatory Policy Analyses"
  http://www.accf.org/TaxPolAn.htm
  The American Council for Capital Formation's web page contains links to numerous online articles related to tax reforms. This nonpartisan, nonprofit agency advocates policies that are designed to encourage savings and investment.

• David Altig, Alan J. Auerbach, Laurence J. Kotlikoff, Kent A. Smetters, and Jan Walliser, "Assessing Fundamental Tax Reform
  http://www.clev.frb.org/research/com98/0115.pdf
  Altig et al. note that reforming the tax code results in a tradeoff among competing objectives. They note that flat-tax and consumption tax proposals would encourage economic growth but would result in a higher tax burden on middle class taxpayers. (To view this document, the Adobe acrobat viewer plugin is required. You may download this viewer by clicking here.)

• David R. Burton and Dan R. Mastromarco, "Emancipating America from the Income Tax: How a National Sales Tax Would Work"
  http://www.cato.org/pubs/pas/pa-272.html
  David R. Burton and Dan R. Mastromarco argue that the existing federal tax structure should be replaced by a national sales tax. They argue that this approach would reduce economic distortions, encourage economic growth, and reduce compliance and enforcement costs.

• William G. Gale, "Tax Reform is Dead, Long Live Tax Reform"
  http://www.brook.edu/comm/policybriefs/pb012/pb12.htm
  In this Brookings Institution Policy Brief, William G. Gale provides a liberal's view of tax reform. He argues that the basic income tax structure should be preserved, but simplified.

• William G. Gale, "Don't Buy The Sales Tax"
  http://www.brook.edu/comm/policybriefs/pb031/pb31.htm
  In this Brookings Institution Policy Brief, William G. Gale argues that recent proposals for a national sales tax would be unenforceable and may have an undesirable effect on tax equity. He suggests that reforms of the existing income tax structure and some flat-tax systems should be the focus of the current discussion.

• OECD, "A World of Taxes"
  http://www1.oecd.org/daf/fa/stats/stats.htm
  This page contains information about tax levels as a share of GDP in OECD countries. As shown in Graph 1, the U.S. has one of the lowest tax burdens among the industrialized countries.

• For Better or for Worse: Marriage and the Federal Income Tax
  http://www.cbo.gov/showdoc.cfm?index=7&sequence=0&from=1
  This comprehensive study, conducted by the Congressional Budget Office, examines the conditions under which a pair of married partners will pay more or less than they would have paid if they were single. A "marriage tax" occurs when total taxes are higher for individuals who are married than they would have been if the individuals were single. This article contains a number of suggestions for reforming the tax structure to reduce the amount of this marriage tax.

• John Barry, "How a Flat Tax Would Affect Charitable Contributions"
  http://flattax.house.gov/bg1093.htm
  John Barry investigates the effect of a flat tax system on charitable contribution in this Heritage Foundation report. Opponents of the flat tax argue that eliminating the deduction on charitable contributions would result in a reduction in charitable contributions (since the relative price of these contributions would rise in the absence of a tax deduction). Barry argues that charitable contributions would increase as a result of the higher economic growth rate and the higher levels of personal income, savings, and net wealth that he believes would occur under a flat tax system.