Max on the budget

Max Sawicky sawicky at epinet.org
Wed Mar 1 11:27:54 PST 2000


DH: But Max, in today's WSJ, James Glassman says McCain's tax plan is a major step down the road to a flat tax! What do you make of it? Is it as reliable as his masterful Dow 36,000? The full text follows. Doug

Yes it is indeed as reliable as his Dow 36,000.

Glassman: . . . Mr. McCain's approach doesn't look like fiddling because it's so simple: Expand individual retirement accounts and push up the bottom tax bracket. . . .

Changing the personal income tax in this way does make it tantamount to a consumption tax. But it is far from simple, not nearly as simple as the flat tax. The flat tax base is defined entirely differently.

Even the IRA itself raises some squiggley problems.

Even so, we would still have the corporate income tax, so the system as a whole would not be a consumption-based system.

CTJ has done the distributional analysis of McCain, and its benefits are mostly to the upper 20% of taxpayers (Bush's are mostly to the upper two percent).

JG again: " . . . The flat tax is a consumption tax. In that regard, it taxes only income spent, not saved. . . . "

Not exactly. Under the flat tax all wages are taxed, whether you save out of them or not. What makes this device a consumption tax is that the returns to savings are not taxed. This is not McCain's plan. You can do consumption tax treatment by one of two routes: deduct savings and tax dissaving (the IRA approach), or deny deductions for savings and don't tax returns to saving (the flat tax approach).

" . . . Last year, Kevin Hassett, my co-author on "Dow 36,000," and I came up with a simple idea we called the Freedom Account -- essentially a universal, unlimited IRA. . . . "

JG is perhaps unaware that their "simple idea" has been in the literature since the 1970's, or perhaps since John Stuart Mill, and it has been in legislation proposed by Sens. Nunn and Domenici about five years ago.

JG: ". . . Mr. McCain's plan goes a long way toward flattening rates. He does something very clever in that he expands the upper limits of the bottom bracket. . . .

Doh! Why didn't anybody else think of that!?!

JG: " This step means that 85% of taxpayers would eventually fall into the same bracket (15%) or pay nothing at all. . . .

n.b. Dick Gephardt proposed something similar some years ago, though his bottom rate was 10%. He financed it by getting rid of almost all deductions and credits.

" . . . good, measured steps toward a flat tax. So is Mr. McCain's proposed permanent moratorium on sales and access taxes on the Internet. . . . "

An exemption, such as for Internet sales, makes the sales tax unflat.

mbs



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