Shaviro on A Blueprint for Future Tax Reform? Evaluating Reform Panel's Report

Daniel N. Shaviro (NYU) has published A Blueprint for Future Tax Reform?  Evaluating Reform Panel's Report, 109 Tax Notes 827 (Nov. 7, 2005), also available on the Tax Analysts web site as Doc 2005-22311, 2005 TNT 215-34.  Here is the Introduction:

Last Tuesday, the President's Advisory Panel on Federal Tax Reform issued its final report. In national politics, this seems to have been something of a non-event. What with the excitement about Lewis Libby, Judge Alito, the war in Iraq, and all the rest, people have plenty of reasons not to pay attention. In addition, few believe that a politically weakened Bush Administration, which got nowhere on Social Security even before absorbing all the body blows of the past three months, is likely to begin a major tax reform effort, or to get anywhere if it does try.

Nonetheless, the Report merits careful attention. Even if it cannot play a role like that of the Treasury I study of 1984, which promptly kick-started a political process that culminated in enactment of the Tax Reform Act of 1986, there is another route to influence worth considering. In 1977, a Treasury tax reform study, Blueprints for Basic Tax Reform, was released despite its plainly being dead on arrival with the change between Administrations. While Blueprints had no immediate political influence, it helped to shape thinking about fundamental tax reform, not just in 1986, but continuing to this day. The Panel will have accomplished much if the Report can exert similar influence over the years, whether through broad concepts that help guide future reform efforts, or by providing a hit list of potentially desirable changes. For this reason, I offer here a quick first-glance assessment of its main features, which I hope will help to stimulate further discussion.

In general, my conclusions are as follows. First, the Panel's revenue parameters, which derive from its instructions and were not chosen by the members, are unacceptable, and thus discourage taking the plans seriously as complete packages. Although ostensibly revenue-neutral, the plans actually would lose almost $20 trillion over the infinite horizon compared to present law. More than two- thirds of the shortfall results from assuming a change in present law -- that is, the law currently on the books -- via extension of the 2001 and 2003 tax cuts to remain in force permanently. The rest results from testing for revenue neutrality only over the next ten years, rather than over the long term. Overall, the combined revenue loss, measured against actual present law, is almost twice the size of the infinite horizon Social Security fiscal gap that President Bush recently decried as posing a severe and immediate fiscal crisis.

Second, there is a lot of merit in the Panel's proposals with regard to individual-level taxation. Here in particular it supplies a useful hit list, and also develops an important approach that has previously received too little attention: converting deductions into credits when accurate income measurement is not at issue.

Third, the Simplified Income Tax has a number of creative and novel features relating to the taxation of businesses. However, their workability remains in some cases unclear. Perhaps the biggest flaw is that businesses could continue avoiding tax at any level, as they often do under present law, by stripping out their taxable income via deductible interest that is paid to tax-indifferent parties. The Plan's corporate integration rule relies on the incoherent present- law distinction between debt and equity, and it would permit businesses to pair accelerated cost recovery with debt that yields deductible interest payments.

Finally, the Growth and Investment Tax Plan, while having many virtues, is worsened by its being a quasi-consumption tax rather than a straight consumption tax. Its add-on tax at the individual level, which gives it this hybrid character, fits poorly into the rest of the structure, with unfortunate implications for tax planning at the business level, and reduces the individual-level simplification that would otherwise be possible. Without this feature, the Growth and Investment Tax Plan would clearly be much simpler for individuals than the Simplified Income Tax. From the standpoint of progressivity, raising the top rate in the Plan would make a lot more sense than imposing the add-on tax.

The discussion in the rest of this article proceeds as follows. First, I discuss the revenue and distributional parameters under which the Panel operated. Second, I discuss the main features that are common to both of the tax reform plans that the Panel sets forth in detail. Third, I examine some of the key features in its Simplified Income Tax Plan. Fourth, I do the same for its quasi- consumption tax Growth and Investment Tax Plan. I conclude with a few brief observations about where we might go from here.