REFORMING TAXATION: ADVANTAGES OF A SAVING- CONSUMPTION NEUTRAL TAX BASE, AND PRINCIPLES TO GUIDE REFORM Stephen J. Enti

REFORMING TAXATION: ADVANTAGES OF A SAVING- CONSUMPTION NEUTRAL TAX BASE,AND PRINCIPLES TO GUIDE REFORMStephen J. Entin Institute for Research on the Economics of Taxation Institute for Research on the Economics of Taxation (IRET)

Growth, Simplicity, Fairness, and Visibility Objectives of Tax Reform 2 Institute for Research on the Economics of Taxation (IRET)

How to Achieve Objectives • Choose a better tax base. • Consumption versus Income. 3 Institute for Research on the Economics of Taxation (IRET)

Income is the earned reward for providing labor and capital to produce goods and services that other people value. Income is proportional to effort. Therefore, the fairest tax is proportional to income. Income 4 Institute for Research on the Economics of Taxation (IRET)

Income is a Net Concept • Revenue less the cost of earning revenue. • Deductions for costs are necessary to measure income properly. 5 Institute for Research on the Economics of Taxation (IRET)

Saving Is a Cost of Earning Income • No saving => no interest, no dividends. • You can't have your principal and eat it too. • Therefore, the best measure of income is consumption. We should tax what we spend. 6 Institute for Research on the Economics of Taxation (IRET)

Neutral Taxes • Do not fall more heavily on saving and investment than on consumption, • Are unbiased against growth, • Are simpler than the income tax, and • Are fair and straightforward. 7 Institute for Research on the Economics of Taxation (IRET)

By Comparison the Income Tax • Taxes people more the more they work, save, and produce by imposing graduated tax rates. • Hits saving and investment harder than consumption. • Encourages consumptionby penalizing saving. 8 Institute for Research on the Economics of Taxation (IRET)

9 Institute for Research on the Economics of Taxation (IRET)

Taxing Capital Income Hurts Workers • Savers can always choose consumption, which is nice for them. • But when they do, investment slumps, and workers lose their jobs. 10 Institute for Research on the Economics of Taxation (IRET)

Steps Toward a Fair, Flat, Unbiased Neutral Tax Step 1. Treat all saving like pensions and IRAs. A tax that is neutral between saving and consumption would either defer tax until the saving is spent, or tax the saving up front and not tax the returns. 11 Institute for Research on the Economics of Taxation (IRET)

Advantage Of Tax Deferred Saving Over Ordinary (Biased) Tax Treatment;Build-up Of $1,000 Saved per Year 12 Institute for Research on the Economics of Taxation (IRET)

Step 2. End Double Taxation of Corporate Income • A neutral tax would not tax corporate income twice. • It would tax it either at the corporate level or the shareholder level, but not both. 13 Institute for Research on the Economics of Taxation (IRET)

Step 3. End the “Death Tax" A neutral tax would not tax estates because estates are accumulated saving that has already been taxed or will be subject to an heir's income tax. 14 Institute for Research on the Economics of Taxation (IRET)

Four Types of Neutral Taxes: • Saving deferred tax (on income less saving). • Flat tax (no deferral, returns exempt). • Sales tax (on income spent, not saved). • Value Added Tax (on output less investment; which equals income less saving). 15 Institute for Research on the Economics of Taxation (IRET)

Elements of a Neutral Tax • All treat saving neutrally vs. consumption. • All employ expensing instead of depreciation. • All are territorial. • All have the same basic tax base. • Differ mainly as to point of collection. 16 Institute for Research on the Economics of Taxation (IRET)

Objective: Growth • Neutral taxation is best for growth. It can yield: • More saving, investment, and growth. Potentially: • Trillions of dollars of added capital. • Millions of added jobs and higher wages. • Thousands of dollars in added family income. • U.S. would become a jobs and investment magnet. 17 Institute for Research on the Economics of Taxation (IRET)

Objective: Simplicity • Neutral taxes are much simpler, even if collected on individual tax forms: • No double taxation. • No limits on savings plans. One universal plan, not dozens. • No separate taxation of capital gains. • No depreciation schedules. • No foreign tax and tax credit. • No phase-outs of dozens of exemptions, credits, deductions. 18 Institute for Research on the Economics of Taxation (IRET)

Objective: Fairness • Consumption is a fairer tax base than income, because it respects the effort of people who work and save. • Neutral taxes can be made progressive to shelter the poor. • There is no need to tax saving and investment more harshly than consumption to achieve progressivity. • The simpler, clearer neutral tax would be seen to be fair. 19 Institute for Research on the Economics of Taxation (IRET)

Objective: Visibility • Only people pay taxes. • Businesses and things don't pay tax. • Taxes are best levied on individuals. • Voters need to see what government costs. • Everyone who can should pay something toward the cost of government. • Simplicity is no excuse for dropping tens of millions of people from the tax rolls. 20 Institute for Research on the Economics of Taxation (IRET)

Conclusion • Tax reform is about- • Getting the tax base right • Setting rates that cover the amount of government that people want to have. • Raising revenue while doing less damage to the economy, and • Informing the voting public what it is paying for government so that they can make informed decisions about how much government activity to support. 21 Institute for Research on the Economics of Taxation (IRET)

Appendix 22 Institute for Research on the Economics of Taxation (IRET)

NIPA Table 5.3.6, line9 26 Institute for Research on the Economics of Taxation (IRET)

REFORMING TAXATION: ADVANTAGES OF A SAVING- CONSUMPTION NEUTRAL TAX BASE, AND PRINCIPLES TO GUIDE REFORM Stephen J. Enti