Board Of Economists: Why Tax Our Patience?

As tax day looms, Americans yearn for a fairer, simpler system. Our expert panel describes how that might work

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When Washington talks taxes, the dickering usually focuses on whose payments should go up and whose should come down. But as April 15 approaches, many frustrated Americans, especially small-business owners, would be thrilled if someone just made the tax forms easier to file. As Congress weighs the impact of the controversial tax cuts proposed by President Bush, TIME's JYOTI THOTTAM asked a group of tax-policy experts to move beyond the current debate and imagine a simpler, more efficient federal tax system. Our Board of Economists--David Bradford of the Woodrow Wilson School at Princeton University and New York University School of Law, Philip Jefferson of Swarthmore College, Dan Mitchell of the Heritage Foundation, Trudi Renwick of the Fiscal Policy Institute and Max Sawicky of the Economic Policy Institute--produced a host of creative ideas and some surprising moments of consensus.

TIME: What are some of the fundamental tax reforms you would like to see?

DAVID BRADFORD: As a Treasury official in the Ford Administration, I became convinced that the way toward a simpler, more transparent system was to base the tax on consumption. The plan we developed would replace the income tax on individuals and corporations. Everything that came into the individual household was taxed, and everything that went out in the form of savings was excluded from tax, with no tax on companies. Since then I have concluded that an indirect approach, with a tax on companies and a graduated tax on individuals, would be easier to implement. The key difference between income tax and consumption tax has to do with the treatment of savings and investment. In a consumption tax, companies expense capital investment immediately. In an income tax, they depreciate it over time.

This approach yields enormous simplification of the rules related to capital gains, interest deductions and the treatment of complex financial transactions. It appalls me that all this brilliant talent is going into the design of ways of gaming our tax system.

TRUDI RENWICK: How would you deal with a mortgage-interest deduction?

BRADFORD: You shouldn't have an interest deduction in my ideal system. It would slowly go away as you move from one system to the other, if the politicians could stand the heat.

DAN MITCHELL: There are two big issues. No. 1, should you have what is called a consumption base? A consumption base is what you find in the flat tax. It is implicit in the national-sales-tax proposals. The second big issue is, do you then have one rate? Then it is a question of how to design it. I would want it to have a low rate, I would want government to be smaller, and I think bringing in less revenue is the only effective means of controlling the size of government.

TIME: And would your perfect tax system be progressive?

MITCHELL: Yes, everyone who supports single-rate tax reform also supports a generous family-based personal exemption, which creates effective progressivity without sacrificing the principle of treating all taxpayers equally. But there is a trade-off. The more income you exempt from taxes for lower-income and lower-middle-income people, the higher your rate has to be--or the more revenue you are going to take away from the government.

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