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SAWICKY: Broadly speaking, going from income to consumption base means a narrower tax base.
BRADFORD: But you are neglecting things like corporate tax sheltering going on now, at huge volumes. I think you actually probably would broaden the base. Anyway, I think it would be more progressive than the system we have now.
TIME: Under the consumption tax, would capital gains be treated as part of income?
BRADFORD: Depends on which consumption tax. Under the X tax--a consumption tax with graduated tax brackets--capital gains at the individual level just aren't there. At the individual level, you pay a tax on your wages and salary. That is it. In a full-fledged individual-level cash-flow tax, which I wrote about in a Treasury study, you pay tax on the whole proceeds. You sell the stock, pay the tax on everything.
MITCHELL: It's important to realize that the money you used to buy the stock in the first place was not taxed. Everything that goes into your savings and investment is not taxed that year.
TIME: What do you hear from small-and medium-size-business proprietors about the burdens of compliance, about distortions? Is that a constituency for reform?
SAWICKY: It raises an issue with the X tax. Presently, if you are a salaried person and you start some kind of kitchen-table business, my understanding is that you can offset business losses; you can use that to offset salary income. But if you have this absolute wall between the individual and the business broadly defined, then you can't do that anymore. Right?
BRADFORD: The boundary issues between the business and individual are tricky.
MITCHELL: The whole issue of commingling business and personal under tax reform underscores the importance of low rates. If you have a rate of 20%, your incentives to manipulate your expenses are much lower.
RENWICK: If you talk to small-business people today, I would say rising health-care cost is probably the biggest item on their agenda of what is hurting their small businesses. There is a place where the government can really play an important role in keeping those costs under control. So there are consequences of having our tax rates too low as well as having our tax rates too high, and we need to have that balance.