Idea: Radical Tax Reform

Editor's Note: On February 6, we asked BlueOregon readers to suggest progressive ideas that the next Oregon Legislature should enact. Over the next several weeks, we'll post some of these ideas here - and ask you to discuss them. Good idea? Bad idea? Any suggestions?

From Don Smith:

I would love to see us move to a statewide tax system that mirrors Rep. John Linder's FairTax at the federal level. Our current system only punishes, er, taxes, those working (i.e. producing) here in Oregon. We spend millions of dollars a year promoting tourism. Why? I don't know. They don't leave any tax dollars behind. Sure, they employ those workers who serve them while they're here, but they'd do that anyway.

As for deductions, the FairTax eliminates all deductions, and completely untaxes those at the lowest rungs of our economy. Can't make ends meet with your McJob? It gets easier with the FairTax because you pay no tax up to the federal poverty level and you no longer get socked with payroll taxes.

It's time Oregonians took a hard look at how we do things. A sales tax without the repeal of our income tax will never fly, but a radical change to a pure consumption-based system has pretty good support.

Thoughts?

Discuss.

[If you have your own original progressive idea to propose, do it here: "There oughta be a law."]

Comments

  • LT (unverified)
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    Doesn't Wyden have a Fair Tax? How does it differ from Linder?

    On the state level, we need a public debate on the whole tax structure.

    Steve Duin gave a good start to that debate on Sunday: (but I think he means SB 382--don't HB have 4 digits?)

    http://www.oregonlive.com/news/oregonian/steve_duin/index.ssf?/base/news/114143554636640.xml&coll=7

    "It's one of those issues where the solutions are not rewarded in the political marketplace," said former Rep. Mark Hass, D-Beaverton. "Any solution is not going to be an easy one; therefore, it's bad politics and the consultants say, 'Don't do it.' "

    Westlund isn't listening to the consultants; neither is he interested in promoting a percentage of the state budget for education, which, Hass notes, is little more than a cynical ploy for political cover. Westlund has beaten the drum for serious tax reform for five years, ever since -- as chief budget writer in the House -- he oversaw the draconian budget cuts during the 2001 special sessions.

    In 2005, a 5 percent sales tax was a major part of a 60-page proposal -- House Bill 382 -- that Westlund cosponsored with Hass, Sen. Kurt Schrader, D-Canby, and Rep. Bob Jenson, R-Pendleton.

  • (Show?)

    OK, I'll bite.

    This post should be renamed "There ought notta be a law."

    Linder's proposal is to replace all federal taxes -- income, corporate income, payroll, capital gains, etc. -- with a massive sales tax. Linder cites estimates that the new federal sales tax would have to be pegged at 23-26% to be "revenue neutral" when compared to the money coming into the federal government under the tax code as it stands, but, of course, if there's one thing Republicans are never honest about, it's taxes and how much something is going to cost. So, I would have to delve into the research on which that figure is based before I would be convinced it was accurate. Moreover, if you preserve popular deductions from the current system (say, the deduction for mortgage interest), I am certain it would require that the new federal sales tax rate be substantially higher.

    So, we would be trading a tax code in which there is only a small amount of progressivity, when you count not only what people are paying in income tax but also what they pay in other taxes (like the payroll tax), for one that is massively regressive. There is nothing "progressive," in the values sense of the word or in the tax sense, about Linder's proposal. Of course, to appreciate the true B.S. quality of Linder's proposal, take a gander at the list of the alleged benefits of the proposal listed on Linder's web site. They include: -Allows you to keep 100 percent of your paycheck, pension, and Social Security payments. -Gross Domestic Product will increase by almost 10.5 percent in the first year after enactment.
    -Compliance costs would decrease by 90 percent.
    -Exports would increase by 26 percent initially and would remain more than 13 percent above the level under the current tax system.
    -Real wages will increase. -Interest rates will fall 25 to 35 percent

    John Linder's federal sales tax - it will actually cause you to re-grow the hair you've lost!

    Whenever I hear Republicans spout this kind of nonsense, it reminds me of one of my favorite Merle Haggard songs, "Rainbow Stew":

    When they find out how to burn water, And the gasoline car is gone. When an airplane flies without any fuel, And the satellite heats our home. One of these days when the air clears up, And the sun comes shinin' through. We'll all be drinkin' free bubble-ubb, And eatin' that rainbow stew.

    Steve

  • Jay Bozievich (unverified)
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    Steve,

    Have you read Linder's Bill? I always find it interesting that people arguing against the Fair Tax Act invent things that are not a part of it then argue against those inventions like your mortgage interest deduction. The new Fair Tax would be a retail sales tax on new items, mortgages and other loans are not even taxed. How can they be exempted? Our current 48,000 page tax code takes billions from our economy in just compliance costs. How long did it take you to prepare and file your income tax this year? I am still working on mine...

    As to the progressive aspects of the current tax code, explain Social Security and Medicare being withheld from the first dollar of earnings? Explain how the inclusion of the cost of income taxes in the price of all goods and services is progressive? At least the Fair Tax makes taxation visible and "prebates" the amount of tax paid by a familiy living at the federal poverty level back to everyone. That means until you spend more than someone living at the poverty level you pay no taxes!

    Finally, America has been losing business to countries with more favorable tax structures for years. Why do you think "offshoring" has become popular? The tax advantage that the Fair Tax would give America over other countries would entice huge investment in America and bring both headquarters and manufacturing back to America. Ever wonder why it is Daimler Chrysler and not Chryler Daimler? (Hint: The German VAT is better than America's tax system)

    Also, all of you who think Jack Abramoff and K street are what is wrong with America, the Fair Tax will do more to correct that problem than any single piece of legislation. Right now with the current tax code it pays for a corporation to invest large sums of money in lobbyist to manipulate that code. The Fair Tax would eliminate that whole industry.

    I suggest anyone interested go to www.fairtax.org

  • Don Smith (unverified)
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    Steve:

    Before you launch into a diatribe about the regressivity of Linder's proposal, check out this chart. It's pretty interesting.

    Single Tax Payer with One Deduction <img src="http://www.flfairtax.net/images/stories/FairTax/23vs30.gif"> If the image doesn't show, click here.

    The current system is not truly progressive. Note that the rate for income earners between 80 and 90 K is higher than for earners up to $319K and just barely lower than for higher earners. You only need to earn $38K to have a third of your income taken for just federal taxes. Then another 9% for Oregon. $38K ain't a heckuva lot of money. Under Linder's proposal, note that the rates are smoothly progressive.

    Also, before ranting on Republican motives for cost structures, note that Linder is, through this legislation, seeking to decrease the amount of power Washington has. R or D, I don't care. Anyone who seeks to decrease his own power (through actions, not words) has my support.

    Please don't just demagogue the legislation because a Republican sponsored it. Examine it. Kick its tires. I'll answer any questions you have, but have some questions. The answers are strikingly good. Your net purchasing power won't likely change much. There is no free lunch. However, job creation, privacy, decreased big-corporation special interest power, and saving Social Security without privatization are all BIG plusses to the FairTax. How are those bad?

  • Todd Hawes (unverified)
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    Don is right. I don't know the specifics off the top of my head, but since there are so many deductions and typically high income earners have more deductions available, there really is not much of a difference between the percent of income that is taxed for most income levels.

    A simple "quasi" flat tax where all deductions are eliminated and the first $35,000 single / $70,000 joint earned are tax free. After that, tax at whatever flat rate you want. At one time deductions were used to tweak and spur growth in one area or another, but now they are only used for catering to special interests groups. Our tax code is an abomination. It is what 1000 pages? In the future, debating tax reform would simply resolve at what dollar amount is tax free and the percent taxed above that dollar amount.

    Tax reform is easy, there is simply no incentive and politician want to be able to reward their constituants (see donors).

  • (Show?)

    Jay,

    Yes, I reviewed Linder’s proposal, the web site, and his FAQs. They were my sources for the information I cited about the proposal. If it wasn’t clear from my first message, I think this proposal is a terrible idea on its own, so my apologies if I was not clear on that point. I don’t think reasons have to be invented, it’s plenty bad on its own. The overriding reason: It takes a federal tax code in which there is a small amount of progressivity and replaces that with a tax code that, overall, would be massively regressive.

    When I said the current code has a small amount of progressivity, what I am referring to is this: we have some taxes – payroll taxes, for example, that are flat and, thus, regressive. We have an income tax that is mildly progressive (although less so after the tax cuts in George W. Bush’s first administration). When you combine all taxes to derive an overall federal tax burden for individuals, my recollection is that there is some rough progressivity to that code. Personally, I would like to see more progressivity in the code not less, but that’s another conversation.

    I do think it is unrealistic to assume that all deductions would be eliminated – deductions for mortgage interest and charitable contributions are good examples of deductions that I think would be hard to eliminate. Every deduction not eliminated drives up the tax rate that would be required for the whole thing to be revenue neutral.

    If you think I am just a progressive blind to the benefits of a great conservative proposal, then I would encourage you to check out what conservative Bruce Bartlett had to say about Linder’s proposal: http://www.taxpolicycenter.org/newsevents/cite_check_fine_print.cfm

    <h2>Here's the text of what Bartlett had to say.</h2>

    House Speaker Dennis Hastert, R-Ill., created a flurry of excitement in Republican circles the other day when it was reported he is proposing in a new book abolition of the Internal Revenue Service. This would be accomplished by eliminating all existing federal taxes and replacing them with a national retail sales tax.

    There is no indication of what tax rate Hastert thinks would be necessary to replace all federal revenue.

    A current proposal by Rep. John Linder, R-Ga., says that a 23% rate would be adequate. But such a low rate can be sustained only by making completely absurd assumptions about what would be taxed. Every serious economist who has ever looked at this question has concluded that a vastly higher rate would in fact be needed.

    First, an unstated assumption is that the 23% rate proposed by Linder is comparable to existing state and local sales taxes, where the tax comes on top of the purchase price. Thus, a 5% sales tax on a $1 purchase comes to $1.05.

    But that's not the way the Linder plan works. He deceptively calculates the rate as if the tax is part of the purchase price. He calls this the tax-inclusive rate. Calculating the rate the normal way people are accustomed to with state and local sales taxes would require a 30% tax rate, not 23%.

    When Congress' Joint Committee on Taxation scored the Linder proposal four years ago, it estimated that it would actually require a tax-inclusive rate of 36%, not 23%, to equal current federal revenues. Calculating the rate in a normal, tax-exclusive manner would mean a 57% rate.

    Economist Bill Gale of the Brookings Institution notes that supporters of the sales tax assume that there will be no tax evasion under their proposal and that the size of government will not grow, even though they would send a large annual check to every American in order to offset the regressivity of the tax. Making realistic assumptions, Gale estimates that the tax-inclusive rate, comparable to Linder's proposed 23% rate, would actually have to be about 50%. A rate comparable to existing sales taxes would be close to 100%.

    And let us not forget that state and local sales taxes would come on top of the federal sales tax, pushing the total rate even higher. Obviously, the federal government is not going to impose tax rates this high, nor would anyone pay them if it did. There would be a massive tax revolt.

    The Linder bill is also deceptive in its assumption that all consumption of goods and services in the U.S. would be taxed. Implicitly, Americans would be taxed on all medical care, purchases of new homes, and services provided by state and local governments. This means that if you are sick and have large doctor bills, you are going to pay 30% on top to the federal government. (Alternatively, you would pay 30% more for health insurance.)

    If you buy a new house listed for $150,000, your actual purchase price is going to be $195,000, including the sales tax. (Alternatively, there could be a tax on the imputed rent homeowners pay themselves for living in their own homes.)

    And if your children receive $20,000 worth of education each year from the local public schools, somehow or other you are going to have to pay an additional $6,000 to the federal government.

    It is completely idiotic to think the American people would allow this to happen. The idea of taxing all consumption sounds nice in theory until you realize just how broad the definition of "consumption" would be under Linder's plan.

    Economist Evan Koenig of the Federal Reserve Bank of Dallas makes the point that any new sales tax is going to raise prices by that amount. If the Federal Reserve accommodates it, we are going to have 30% inflation the year the tax is introduced. If it is not accommodated, then producer prices are going to have to fall by 30%, which will cause a severe recession and greatly reduce the tax yield.

    Somehow or other, Linder has gotten 54 House members to co-sponsor his proposal. They should all pray that their opponents overlook their poor judgment. When last the national retail sales tax was a major campaign issue -- in the 1996 Senate race in Louisiana -- the Republican sales tax supporter was crushed by his anti-sales tax Democratic opponent. That may explain why only two senators support Linder's plan, one of whom is retiring this year.

    <h2>With all due respect to Speaker Hastert, trying to eliminate the IRS by adopting a national retail sales tax is a very dumb idea.</h2>

    I am not saying that the current federal tax code is perfect, because it is far from perfect. I think the first principle that should be resorted to in trying to fix the code’s imperfections is to do no harm, and I am convinced that this proposal would be harmful.

    Steve

  • Don Smith (unverified)
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    Steve:

    You still don't get it. YES, all deductions go away, because there IS no more income tax. No tax on the labor of human beings. Only a tax on their consumption, and then only on the consumption above the poverty level. There is no tax whatsoever on individuals until they spend more than the minimum to survive. And those who "live off the grid" or "off the land" or sustainably, they have less of a burden.

    The criticisms forwarded in the above article have been completely debunked. Did you look at the chart? You will notice that if you make $70,000 per year, the exclusive rate you pay is 55%? In other words, if you earn $50K, and your tax burden is 35% with FICA, you get to take home $32,500. Reverse the math and see that the "price" of your labor is $32,500 and the tax you pay ($17,500) equals 55%.

    The plan is revenue neutral. That means, by definition, your purchasing power will be roughly the same. 30% inflation is LUDICROUS on its face. It would be the same if I said it would be revenue neutral, but you'll have all this free money. Won't happen.

    More to follow. Gotta go.

  • Jay Bozievich (unverified)
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    Steve,

    If your read Linder's proposal you would understand that there is no possible way to "deduct" either mortgage interest or charitible deductions from a sales tax. Therefore your argument about actual rates does not rate any further discussion until you can explain how to take a deduction from a sales tax.

    Second, Bartlett has a vested interest in the status quo as a lobbyist in Washington. His point about tax evasion is also true for the current income tax and what he is not telling you is the other assumptions made by the Brookings Institute about exclusions they included in their analysis that are not in the Fair Tax Act to get to thier assumed 50% rate.

    Third, All taxes paid by businesses are paid for by the individuals that purchase the products and services of businesses. Income taxes, capital gains, employers portion of FICA, etc. are all in the price of goods and services in this country. The Fair Tax removes these taxes incuded in the price thus lowering the price then adds it back in at the end. So Bartlett's final argument about prices increasing is not complete.

    Any realistic look at the Fair Tax Act shows it is more progressive than our current system, will stimulate the economy helping out the working man and it will be far less complicated thus freeing up people to do something more constructive in April than telling the government more details about their lives than it out to know.

  • (Show?)

    Don,

    No, I get it. I understand under the proposed Linder system the income tax goes away. Let me try to explain what I am saying: If it was politically unpalatable to stop giving people some kind of tax break for mortgage interest, what we now call a deduction in our current system could be transmuted into a larger "pre-bate" under the Linder system. Under Linder's proposal, you still file an annual tax return to tell the government how many people you have in your household, which, under the Linder system, determines the amount of your pre-bate. Do you see any reason your housing couldn't also be covered on such a tax form (and have the government give you a larger pre-bate on the basis of the information you provided)?

    Again, I would prefer to keep the discussion on this point: adopting a hefty regressive sales tax as a replacement for our current system, warts and all, is no improvement.

    Steve

  • (Show?)

    Jay,

    You stated that Bruce Bartlett has a "vested interest in the status quo as a lobbyist in Washington." Bartlett is not a lobbyist to my knowledge. Until last fall, he worked at a thinktank based in Dallas, the National Center for Policy Analysis. He got fired from that job more or less for writing a book entitled, Impostor: How George W. Bush Bankrupted America and Betrayed the Reagan Legacy, the subject matter of which is evident in the title. He also happens to be guest blogging at the NYT this month.

    From what I know of him, I think Bartlett leans libertarian, and would prefer a much smaller federal government. He just doesn't seem to have much patience for the fiscal smoke-and-mirrors crowd, e.g., the kind of people who argue that tax cuts "pay for themselves."

    Steve

  • LT (unverified)
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    The first line of this post talks about a state tax system that mirrors Linder. Seems there has been more talk about Linder than about state taxes.

    On a couple of topics here there has been discussion of the Hunt-Berger capital gains tax cut with a twist which Wayne Scott made sure died in committee, including this Contrast that with the Hunt-Berger capital gains tax cut coupled with changes in the corporate income tax and the kicker. The bill is HB 3114. You can find the full text here: http://www.leg.state.or.us/05reg/measures/hb3100.dir/hb3114.intro.html

    Steve Duin wrote last Sunday about Ben Westlund's budget approach and the Westlund. Schrader, Hass bill SB 382.

    Could we get a discussion of such actual Oregon legislation rather than just debating Linder?

  • Don Smith (unverified)
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    Steve:

    I think that the sales tax is demonstrably more progressive than what we have because of the prebate. You may believe we should penalize higher productivity more, in the form of a highly progressive income tax, and you are entitled to that opinion.

    I believe history and economic theory show that highly progressive tax rates stifle economic growth, leading to lower revenues to the government. The rich will always find ways, or pay to have such ways created, to hide their income from taxation - tax avoidance. However, there is no way to hide your consumption from taxation without complicity from a third party. The law anticipates this and pays the collectors (retailers, etc.) to collect the tax.

    Home Depot or Target or Regence Blue Cross is not going to help you evade your taxes.

    With respect to the mortgage deduction - the whole point of the FairTax is to do away with the loopholes, deductions, and exceptions that politicians use to curry favor with a given demographic. The FairTax is design ed to be just that - fair. Drug dealers contribute. Foreign shoppers contribute. You and I contribute, all based on our level of consumption. A side benefit is that without taxation on production, there is no disincentive to produce more. Without capital gains taxes, there is no disincentive to save more. And no disincentive to take a risk beyond the reward/risk analysis of the decision itself.

    Imagine how many jobs would be created when the US of A becomes the destination for labor because there are no tax implications for businesses. Imagine the boon to unions who would finally see their ranks swelling instead of shrinking. Imagine all the people....

    Bartlett raises some good questions. However, a closer look will show that the 23% rate (30 if you calculate it like a sales tax) is valid. Linder oversells it on his site. He's inaccurate. And Neal Boortz, the radio show host who co-wrote the book with him has acknowledged they oversold it and corrected it in the second printing.

    But the fact is that the current system is a special-interest laden mess and the Fairtax, with its warts, is a fairer, more respectful, more growth oriented system that I believe is better.

  • (Show?)

    LT,

    You asked, "Could we get a discussion of such actual Oregon legislation rather than just debating Linder?" To transfer Linder's ideas to the state level, I suppose the proposal would be this: You would replace Oregon's current tax structure, which is an income tax but no sales tax, with its opposite, a relatively high sales tax with no income tax. Linder's plan is supposed to be revenue neutral, in that it replaces the current federal tax structure with a national sales tax that brings in the same amount of money. Replacing the income tax in Oregon with a sales tax that brings in roughly the same amount of money as the income tax does now, in my view, wouldn't be of much use because it wouldn't move us any closer to solving any of Oregon's budget woes or school funding issues.

    Steve

  • (Show?)

    Don,

    For starters, I am all for taking steps to lessen the tax burden of those with an income below the poverty level. Personally, I would like to see the working poor and middle class paying less in taxes, and the tax rates in the highest brackets returned to Clinton-era levels. Yes, everyone remembers the dreadful Clinton era, where the high tax rates choked economic growth, and resulted in poor job creation and massive deficits. I’m sorry… what was it you were saying about history showing that progressive tax rates stifled economic growth? As I said in my first message, I am not convinced the sales tax would only have to be 30% for the plan to be revenue neutral. I suspect the number is higher, if for no reason other than the people proposing it and sponsoring it have a history of never being straight with the numbers. Of course, there’s also the Joint Committee on Taxation’s scoring of Linder’s proposal, which concluded the sales tax rate would have to be higher. It’s not the only analysis out there, though. There’s plenty of evidence that I turned up in google searches for reality-based analysis of Linder’s proposal that suggests that’s the case.

    Steve

  • PDX Guy (unverified)
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    How is a national sales tax of 23 or 30 percent progressive? Will someone who earns less than the poverty level carry an ID card that says "I make less than the poverty level" that exempts this person from paying taxes? Let say you have a billionaire (Mr. Paul Allen) and a migrant farm worker. All things being equal, Paul Allen is going to eat the same amount of food as a farm worker. Paul Allen is going to be able to afford his sales tax payments. Will the farm worker be able to do so? Granted, Paul Allen is also going to purchase luxury items, but fundamentally, I can't see how this tax is progressive.

    Secondly, the American economy is based on consumption. Consumer spending has been the main engine that has powered the economy through the last few economic downturns. A national sales tax of 30% and then state sales tax on top of that is going to give a lot of people pause when decide to purchase something like a car or a home.

  • LT (unverified)
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    Ron Wyden is on Ed Schultz talking about his Fair Flat Tax. So why no discussion here about that, and only "to transfer Linder's ideas to state level..."?

    This is Blue OREGON, and Wyden is Oregon's Democratic Senator, so why only discussion of Linder?

  • (Show?)

    LT,

    I think the discussion has been about Linder's proposal because that was the subject of the original post that started the discussion. If you want to take the conversation in a different direction, then I think you should do it.

    I responded only to the original post because I thought moving from our current tax system to a hefty national sales tax was a really bad idea, and I felt like someone needed to point that out, because, as you say, this is Blue Oregon.

    Steve

  • LT (unverified)
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    Steve--I lived thru the sales tax wars of the 1980s, was "not a real Democrat" because I thought there might be room for a well thought out sales tax as part of the tax system. Operative words are "well thought out". But some people were so rabid they treated those willing to even look at a sales tax the way Robertson/ Falwell would treat people who even want to debate abortion (if you get my drift). I think we should debate the whole tax system, not just whether Linder had a good idea.

    As I understand it, SB 382 has a number of components, one of them being a sales tax. If people don't like that, they should propose a viable Oregon alternative or, as Westlund says, "defend the indefensible".

  • BlaueRosen (unverified)
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    Tax reform should be the #1 agenda item for the next legislature. No other state in the nation is as reliant on a single source of funding as is Oregon.

    Take a look at slide 5 in this presentation for a graphic representation of how out of balance our structure is when compared to the rest of the country.

    <h2></h2>
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