WHITE HOUSE OFFICIALS are hopeful that the signing of George W. Bush’s tax cut marks the beginning of their tax agenda, not its completion. The next item, they indicate, will be tax reform. While the president has yet to offer any clues about what sort of reform he will propose, his appointments to key positions already tell us a great deal. Remarkably, every top tax policy official has been associated with a major tax reform proposal. These include Treasury secretary Paul O’Neill, National Economic Council director Lawrence Lindsey, Council of Economic Advisers chairman R. Glenn Hubbard, and Mark Weinberger, assistant secretary of the Treasury for tax policy. Looking at some of the specifics of the tax reform plans previously proposed or endorsed by these officials gives a road map to where the Bush administration may ultimately go on tax reform. PAUL O’NEILL: While he was chairman of Alcoa, O’Neill co-chaired with Robert Lutz of Chrysler a group called Alliance USA. This group raised substantial funds in the corporate community to promote a tax plan proposed by senator Pete Domenici, Republican of New Mexico, and former senator Sam Nunn, Democrat of Georgia. The essence of the Nunn-Domenici plan was to eliminate saving from the tax base. This would, by definition, create a consumption-based tax system. On the business side, Nunn-Domenici proposed a value-added tax (VAT) in place of the corporate income tax. Firms would be taxed on their gross receipts from domestic sales, less payments to other domestic businesses for goods or services. Foreign sales would thus be excluded and there would be no deduction for foreign purchases. Employee compensation would not be deductible, and all capital equipment would be immediately expensed, not depreciated over a period of years, as is the case now. Net receipts would be taxed at a 10 percent rate. However, firms would also receive a tax credit for the employer’s share of the payroll tax. On the individual side, the tax base would also start with gross receipts, including wages, interest, dividends, and pensions. However, taxpayers would get a full deduction for all net saving and investment, as well as deductions for mortgage interest, charitable contributions, and tuition. Tax rates would start at 19 percent and rise to 40 percent on taxable income above $14,400 for singles and $21,000 for married couples. But individuals would also receive a tax credit for payroll taxes and a large family living allowance. The net result of this system would be to maintain the current distribution of the tax burden, while getting saving out of the tax base. This, its supporters believe, would lead to substantially greater saving and investment, and hence faster economic growth. LAWRENCE LINDSEY: In his 1990 book The Growth Experiment, Lindsey lays out a 19 percent flat tax proposal similar to the one long championed by Steve Forbes and House majority leader Dick Armey. Lindsey’s version is less simple than some flat tax proposals, although it would still be a major improvement over today’s tax system. Like Nunn-Domenici, Lindsey would tax individuals on their gross receipts, including fringe benefits and capital income. However, capital gains and interest would be inflation-adjusted, so that taxes would apply only to real income. Individuals would also get a deduction for saving, capped at $5,000. There would be a large personal exemption and a limited additional deduction for child care expenses. Deductions for mortgage interest and state and local taxes would be retained, but limited from what is currently allowed. The business side of the Lindsey plan is very similar to Nunn-Domenici, but without the credit for payroll taxes. Both individuals and businesses would be taxed at the same rate of 19 percent. R. GLENN HUBBARD: During the first Bush administration, Hubbard served as deputy assistant secretary of the Treasury for tax analysis. There he devised a tax reform plan that was issued by the Treasury in the waning days of that administration, on December 10, 1992. On the individual side, Hubbard would keep the existing tax structure, but dramatically raise the standard deduction, to $19,650 for individuals and $33,800 for married couples. With the personal exemption, a single person would need to make more than $22,000 before paying any income taxes. A couple with two children would need to make more than $43,000. The result would be a very substantial tax cut for many middle-income taxpayers, as well as considerable simplification, with more than half of all tax filers exempted from the income tax. Businesses would see much more substantial changes under the Hubbard plan. The corporate and individual income taxes would effectively be integrated by allowing corporations a deduction for dividends. The Alternative Minimum Tax would be repealed and rules regarding foreign-source income greatly simplified. Hubbard would also impose a new Business Transfer Tax, a kind of value-added tax, on top of the corporate income tax to pay for the other tax cuts. MARK WEINBERGER: While on the staff of former senator John Danforth, Missouri Republican, Weinberger helped draft a reform plan that his boss cosponsored with former senator David Boren, Oklahoma Democrat. On the individual side, Danforth-Boren would triple the standard deduction. Current tax rates would be retained, but the Social Security payroll tax would be cut in half for both individuals and businesses. Much more fundamental changes would take place on the business side. Danforth-Boren would eliminate the corporate income tax and replace it with a 14.5 percent Business Activities Tax, similar to the type of VAT in the Nunn-Domenici and Lindsey plans. GEORGE W. BUSH: While President Bush has never put forward a plan to reform the federal tax system, he did initiate a tax reform plan in Texas. When he became governor in 1995, one of his first acts was to appoint a tax reform commission. Its main job was to find a way of reducing high property taxes, and its only constraint was that it could not recommend a personal income tax. The commission proposed three options for raising new revenue that could be used to lower property taxes: a gross receipts tax on businesses, an increase in the sales tax, and a VAT-like business activities tax. In 1997, Bush submitted this third option to the legislature. The rate would have been 1.25 percent on gross receipts less payments to suppliers, capital investment, and a $500,000 exemption. In the end, the legislature did not support Governor Bush’s proposal. Nevertheless, it is revealing that his proposal for reforming the Texas tax system relied on a kind of value-added tax for businesses. Indeed, the common theme in all these tax plans seems to be some sort of VAT on the business side of the tax code. Virtually all European countries have such a tax, although none has used it to replace other corporate taxes. It has the great virtue of being able to raise large revenues at relatively little economic cost and can thus be used to finance individual tax cuts. As a replacement for the corporate income tax, it would be an enormous improvement, because it allows expensing of capital investment and is refunded at the border on exports. The problem with the VAT, politically, has been that liberals have viewed it as regressive. Because the tax goes directly into the prices of goods, the poor would pay more than they do now. Conservatives have been equally skeptical of a VAT, viewing it as a money machine. They note that VAT rates are much more easily raised than income tax rates, and that the VAT’s high revenue-raising ability often fuels a vast increase in government spending. Only half in jest, former Treasury secretary Larry Summers once said that the United States would adopt a VAT when liberals figure out that it is a money machine and conservatives realize that it taxes the poor. There is less similarity on the individual side of the various plans, but it does appear that all would do something to ease the tax burden on saving an
d would exempt more people from the income tax. Only Lindsey proposed a flat tax, the reform that has received most attention in recent years. The others would maintain progressive rates. Of course, none of the people mentioned above can be held responsible now for proposals they put forward in the past, in different positions and contexts. But it is nonetheless revealing that every Bush administration official with anything to say about tax policy, including the president, is on record as having proposed or supported some sort of value-added tax for businesses. Given this fact, it would be very surprising if such a tax did not form the basis of any future Bush administration tax reform initiative. Bruce Bartlett is a senior fellow at the National Center for Policy Analysis.
