My colleague Steve Teles writes, at Democracy Journal, on what he would like to see in tax reform:

A good example of such a reform is the one designed by Columbia Law School’s Michael Graetz, which he calls the “competitive tax.” In brief, the Graetz plan would impose a value-added tax (VAT) of just under 13 percent, cut the corporate tax to 15 percent, and eliminate the income tax entirely for families under $100,000, with rebates for the lowest earners (in part to replace the earned income tax credit and child tax credit, and to compensate for the fact that a VAT would disproportionately hit lower earners)

Graetz’s plan does not broaden the base of the income tax as substantially as most reform plans, but there is plenty of room to do so (especially since Republicans are already mowing down the mortgage and state and local tax deductions), which would increase the progressivity of his plan significantly. It would make sense to add to Graetz’s plan a financial transaction tax, which would also have the benefit of counteracting excessive financialization of the economy.


The combination of stiffened income, financial transaction, and estate taxation could be used to fund even larger rebates to low income taxpayers, which could compensate for a somewhat larger VAT, higher alcohol taxes, and a substantial carbon tax.

As tax plan, there is a lot to like here. Broad based consumption taxes, like a VAT, are a perennial favorite of public finance economists. They raise large amounts of review, with a relatively light footprint. That is, they have little net effect on economic activity. On the other hand, the alcohol and carbon taxes raise less revenue over the long term, but are desirable because they target activity that is socially harmful.

I am less keen on the idea of a financial transaction tax. Unlike Steve, I have yet to be convinced that the financial services industry, as a whole, is too large, or that the economy would be better off with fewer resources devoted to capital allocation. Since the Great Recession, capital investment has been disturbingly low, and there is some evidence that restrictions on the financial industry are partially responsible.

In any case, I think Steve’s analysis of the appeal of the Graetz plan is somewhat misleading:

While it has many economic advantages, from my point of view [this plan’s] greatest attraction is political. By pulling the great bulk of taxpayers out of the income tax entirely, it will create a much sturdier political foundation for even higher income taxes in the future, and eliminate the appeal to most citizens of the politics of income tax backlash. Republican attacks on the income tax would be entirely without attraction for most citizens—including most Republican voters.

The Republican policy position is actually not that different from the one Steve favors.

Last year, 44 percent of households paid no income tax. Yet, both GOP tax reform plans would increase the standard deduction and the child tax credit, meaning that even fewer households would owe income taxes.

The House tax reform bill didn’t lower the top income tax rate at all, and the Senate bill lowered it by a symbolic 1 percentage point. The rates and brackets proposed in the House’s bill end up being conceptually similar, though less generous than Graetz’s. For example, Graetz would tax income between 200K and 600k at 27 percent. The House proposal, after the standard deduction, taxes income between 114K and 280K at 25 percent.

Indeed, the current reforms offered by the GOP would actually slightly increase the amount raised through individual income tax, in line with Steve’s long term goals. And, the original corporate tax reform push included the DBCFT, a complex proposal that would have amounted to creating a VAT and using part of the proceeds to reduce the payroll tax.

All of these measures point towards a considerable convergence in views over tax policy.