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Michael Graetz's tax reform plan

By Daniel Shaviro

Today I was at a session at Columbia Law School where Michael Graetz presented his tax reform plan, from a forthcoming book. Among his main ideas is to enact a VAT and use some of the revenues to give the income tax a $100,000 exemption amount, thereby eliminating income tax filing for people earning less than that. Such individuals would exit not only the income tax, but generally the filing of annual federal tax returns that base liability on household circumstances. This has implications for differential rates and adjustments for dependents, to the extent that other mechanisms aren't able to pick up the slack.

I've commented adversely on the proposal before at this site, but am prepared to change my tune a bit now. I certainly would welcome the adoption of Graetz's tax reform plan, as well as of any of the main academically posited alternatives, compared to keeping the status quo. I remain a bit concerned that it doesn't do as much as it could for equity as between different households below $100,000. He rightly points out that, politically, discretion to adjust for household circumstances in this range is not always used for the best. And he has tried to address the problem in some ways.

Other proposals, such as the Bradford X-tax, have advantages over the Graetz plan, e.g., in rationalizing business taxation. He rightly points out that they are not likely to be politically feasible. Not clear that his plan is either, but if he manages to get somewhere with it, then more power to him. I'd certainly be a supporter relative to the politically likely alternatives.

The fact that his plan, like the others, seems to me unlikely to be politically feasible, highlights a key dilemma, which is: What do you propose if nothing good seems possible? Actually, I think our political choice problems are even worse than this. Not only is nothing good possible; nothing possible is possible. That is, an unsustainable policy (by definition) can't be sustained, but nothing sustainable can be enacted any time soon.

At least he is trying to find a way to square the circle, and it's not his fault that this is likely to be a hopeless task. I personally think the best political maneuver to grease the skids for adding a VAT to the current mix (which at some point is likely to be unavoidable, even if not one's first choice) is to purport to earmark all of the revenues towards addressing funding shortfalls in social insurance programs. Hopefully as part of lowering the programs' growth rates to be more sustainable. But this is obviously a long way off anyway.

Pending that, I'd be glad if I were wrong and the plan proved to have some political traction. Clearly my preferred alternatives don't.

Full post as published by Start Making Sense on December 06, 2007 (boomark / email).