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A New Tax Framework: a Blueprint for Averting a Fiscal Crisis

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A New Tax Framework: a Blueprint for Averting a Fiscal Crisis A New Tax Framework : A Blueprint for Averting a Fiscal Crisis Framework : A Blueprint for Averting A New Tax A New Tax Framework: A Blueprint for Averting a Fiscal Crisis Committee for Economic Development A Statement by the Research and Policy Committee 2000 L Street NW, Suite 700 Washington, D.C. 20036 of the Committee for Economic Development Phone: (202) 296-5860 Fax: (202) 223-0776 CED www.ced.org A New Tax Framework: A Blueprint for Averting a Fiscal Crisis A Statement by the Research and Policy Committee of the Committee for Economic Development A New Tax Framework: A Blueprint for Averting a Fiscal Crisis Includes bibliographic references ISBN: 0-87186-178-X First printing in bound-book form: 2005 Printed in the United States of America COMMITTEE FOR ECONOMIC DEVELOPMENT 2000 L Street, N.W., Suite 700, Washington, D.C., 20036 (202)-296-5860 www.ced.org ii Table of Contents Executive Summary 1 I. INTRODUCTION: WHY THIS POLICY STATEMENT? 5 II. THE IMPENDING FISCAL CRISIS 7 Why We Must Act: The Dimensions of the Fiscal Crisis 7 Why We Must Act On All Budgetary Fronts 10 Why We Must Act Now 11 III. WHAT’S WRONG WITH THE INCOME TAX? 13 The Current Income Tax is Complex, Opaque, and Unstable 13 Tax Preferences Impair Economic Stability and Growth 15 Tax Expenditures Are Often Inequitable 18 The Tax System is Burdensome to Taxpayers and the Government 18 The Income Tax Alone Cannot Raise Sufficient Revenues 19 IV. A NEW FRAMEWORK: CED’s RECOMMENDATIONS 21 Summary of Recommendations 22 Discussion of Recommendations 23 V. ADDING IT UP: THE BUDGET IMPACT OF THE NEW FRAMEWORK 33 Spending Restraint Under Current Tax Policies 33 The CED Tax Framework With Spending Restraint 34 VI. CONCLUSION 37 Endnotes 38 iii Responsibility For CED Statements On National Policy The Committee for Economic Development is an proposals; its purpose is to urge careful consideration independent research and policy organization of over of the objectives set forth in this statement and of the 200 business leaders and educators. CED is non-profit, best means of accomplishing those objectives. non-partisan, and non-political. Its purpose is to pro- Each statement is preceded by extensive discussions, pose policies that bring about steady economic growth meetings, and exchange of memoranda. The research at high employment and reasonably stable prices, is undertaken by a subcommittee, assisted by advisors increased productivity and living standards, greater chosen for their competence in the field under study. and more equal opportunity for every citizen, and an improved quality of life for all. The full Research and Policy Committee participates in the drafting of recommendations. Likewise, the trust- All CED policy recommendations must have the ap- ees on the drafting subcommittee vote to approve or proval of trustees on the Research and Policy Commit- disapprove a policy statement, and they share with tee. This committee is directed under the bylaws, which the Research and Policy Committee the privilege of emphasize that “all research is to be thoroughly objec- submitting individual comments for publication. tive in character, and the approach in each instance is to be from the standpoint of the general welfare and not The recommendations presented herein are those of the from that of any special political or economic group.” trustee members of the Research and Policy Committee The committee is aided by a Research Advisory Board and the responsible subcommittee. They are not necessarily of leading social scientists and by a small permanent endorsed by other trustees or by non-trustee subcommittee professional staff. members, advisors, contributors, staff members, or others The Research and Policy Committee does not attempt associated with CED. to pass judgment on any pending specific legislative iv Research and Policy Committee Co-Chairmen RONALD R. DAVENPORT NICHOLAS G. MOORE Chairman of the Board Director PATRICK W. GROSS Sheridan Broadcasting Corporation Bechtel Group, Inc. Chairman, The Lovell Group JOHN DIEBOLD STEFFEN E. PALKO Founder, AMS Chairman Retired Vice Chairman and President BRUCE K. MACLAURY John Diebold Incorporated XTO Energy Inc. President Emeritus FRANK P. DOYLE CAROL J. PARRY The Brookings Institution Retired Executive Vice President President General Electric Corporate Social Responsibility Associates T.J. DERMOT DUNPHY Vice Chairman Chairman VICTOR A. PELSON Kildare Enterprises, LLC IAN ARNOF Senior Advisor UBS Warburg LLC Retired Chairman W. D. EBERLE Bank One, Louisiana, N.A. Chairman PETER G. PETERSON Manchester Associates, Ltd. Senior Chairman The Blackstone Group EDMUND B. FITZGERALD REX D. ADAMS Managing Director NED REGAN Professor of Business Administration Woodmont Associates University Professor The Fuqua School of Business The City University of New York HARRY L. FREEMAN Duke University Chair JAMES Q. RIORDAN ALAN BELZER The Mark Twain Institute Chairman Retired President and Quentin Partners Co. BARBARA B. GROGAN Chief Operating Officer LANDON H. ROWLAND AlliedSignal Inc. President Western Industrial Contractors Chairman PETER A. BENOLIEL Ever Glades Financial RICHARD W. HANSELMAN Chairman Emeritus GEORGE RUPP Quaker Chemical Corporation Chairman Health Net Inc. President ROY J. BOSTOCK International Rescue Committee RODERICK M. HILLS Chairman ROCCO C. SICILIANO Sealedge Investments Chairman Hills & Stern, LLP Beverly Hills, California FLETCHER L. BYROM EDWARD A. KANGAS MATTHEW J. STOVER President and Chief Executive Officer MICASU Corporation Chairman and Chief Executive Officer, Chairman Retired LKM Ventures DONALD R. CALDWELL Deloitte Touche Tohmatsu ARNOLD R. WEBER Chairman and Chief Executive Officer JOSEPH E. KASPUTYS Cross Atlantic Capital Partners President Emeritus Chairman, President and Northwestern University CAROLYN CHIN Chief Executive Officer JOSH S. WESTON Chairman and Chief Executive Officer Global Insight, Inc. Cebiz Honorary Chairman CHARLES E.M. KOLB Automatic Data Processing, Inc. A. W. CLAUSEN President Retired Chairman and Committee for Economic Development Chief Executive Officer ALONZO L. MCDONALD BankAmerica Corporation Chairman and Chief Executive Officer JOHN L. CLENDENIN Avenir Group, Inc. Retired Chairman BellSouth Corporation v Subcommittee on Tax Reform Chair W. Mark Lanier *Josh S. Weston Partner Honorary Chairman *W. Bowman Cutter The Lanier Law Firm, PC Automatic Data Processing Inc. Managing Director Warburg Pincus William Lewis *Linda Smith Wilson Director Emeritus President Emerita Trustees McKinsey Global Institute Radcliffe College Ian Arnof McKinsey and Company, Inc. Retired Chairman Margaret Wilson Bank One, Louisiana, N.A. Donald K. Peterson President and Chief Executive Officer President & CEO Scarbroughs Peter A. Benoliel Avaya Inc. Chairman Emeritus Jacob J. Worenklein *James Q. Riordan Quaker Chemical Corporation President and Chief Executive Officer Chairman US Power Generating Company Quentin Partners Co. David A. Caputo Ex-Officio Members President E.B. Robinson, JR. Pace University Chairman Emeritus Patrick W. Gross Deposit Guaranty Corporation Chairman, The Lovell Group Carolyn Chin Founder, AMS, Inc. Chairman and Chief Executive Officer Landon H. Rowland Cebiz Chairman Bruce K. MacLaury Ever Glades Financial President Emeritus Ronald Davenport The Brookings Institution Chairman of the Board George Rupp Sheridan Broadcasting Corporation President Advisors International Rescue Committee John Diebold William G. Gale Chairman Bertram L. Scott Senior Fellow, The Brookings Institution John Diebold Incorporated President Co-director, Urban-Brookings TIAA-CREF Life Insurance Company Tax Policy Center Irwin Dorros TIAA-CREF President C. Eugene Steuerle Dorros Associates John C. Siciliano Senior Fellow Director, Global Institutional Services The Urban Institute *W.D. Eberle Dimensional Fund Advisors Co-director, Urban-Brookings Chairman Tax Policy Center Manchester Associates, Ltd. Lawrence Summers President Project Director Pamela B. Gann Harvard University Van Doorn Ooms President Claremont McKenna College Stephen Joel Trachtenberg Senior Fellow Committee for Economic Development President Gerald Greenwald George Washington University Managing Partner Project Associates Greenbriar Equity Jerry D. Weast David Kamin Superintendent Jerome Grossman Montgomery County Public Schools Jessica Nuzzelillo Senior Fellow Harvard University Arnold R. Weber Katherine Twomey President Emeritus Judith H. Hamilton Northwestern University Retired CEO, Classroom Connect, President, Hamilton Consulting * Voted to approve the policy statement but submitted memorandum of comment, reservation or dissent. See page 43. vi Purpose of This Statement Responsible projections of federal expenditures and the overall tax system. We recommend modifications revenues indicate an impending fiscal crisis. This to the income tax to reduce its complexity (including prospective explosion of future budget deficits is repeal of the alternative minimum tax, or AMT) and driven primarily by rapidly rising health care costs improve its efficiency and equity, as well as changes in and the aging of our society. As this report shows, the tax-writing and budget processes. We believe this even very substantial restraint in the growth of new tax framework can help avert the impending fiscal federal expenditures is unlikely, in itself, to restore crisis and create a sound foundation for future growth fiscal stability. and prosperity. In the longer term, far-reaching structural reforms in our health care system and federal
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