NEWS AND ANALYSIS

Panelists Urge Congress to Goulder said. ‘‘That’s why you see these trends that (C) Analysts 2013. All rights reserved. does not claim copyright in any public domain or third party content. Seek Alternative to Income Tax are going on in the world.’’ Need for Revenue One of the key considerations in a possible tax By Meg Shreve — [email protected] reform effort and for the future of the income tax is Lawmakers should consider a revenue source whether the code should raise more revenue than it apart from the income tax to pay for the cost of does, unlike the revenue-neutral Tax Reform Act of government, panelists said at a February 22 Tax 1986. Analysts forum. Christopher E. Bergin, president The 1986 law offset and publisher of Tax Analysts, moderated the panel reduced marginal rates discussion on whether the federal income tax, for individuals with in- which turned 100 last month, can retain its role as a creased corporate , prime source of federal revenue. Columbia Law School professor Michael J. The income tax system, Graetz said. In 1986 there which became possible Michael J. Graetz was a ‘‘pot of gold to only with the ratification finance rate cuts, and of the 16th Amendment, there is no pot of gold today,’’ he added. developed when broad- based state-level property Jared Bernstein, senior taxes grew increasingly fellow at the Center on Budget and Policy Priori- Christopher E. Bergin impractical, according to Joseph J. Thorndike, di- ties, argued that the rector of the Tax History Project at Tax Analysts. needs rev- ‘‘As the financial world got more complicated, it enue greater than its his- became harder and harder to tax all forms of torical average of 18 property because a lot of it was invisible,’’ percent of GDP. Focusing Thorndike said. on the psychology of tax- payers, Bernstein sug- The original income tax was set at 7 percent, with gested that a way to gain an exemption set at $100,000 in today’s dollars, and greater support for tax re- it was intended to be a ‘‘light tax applied to just a Jared Bernstein form that raises revenue handful of people,’’ Thorndike said. would be to tie taxes more directly to the programs Whether the income tax is now failing and they fund, for example with dedicated infrastruc- should be replaced, just as it replaced state-level ture or healthcare taxes. ‘‘If people are disconnected property taxes, is open to debate, Thorndike said. between what they’re willing to pay for and what ‘‘What seems more likely to me is that the income they get, our tax system can’t survive,’’ Bernstein tax may have to share the stage fairly soon,’’ just as said. the old property tax system overlapped with the Thorndike argued that President Obama, by fo- income tax before slowly fading away, he said. cusing on tax increases for a narrow sliver of the Robert Goulder, editor population, has given the U.S. public only ‘‘20 in chief of Tax Analysts’ percent of an affirmative case’’ for higher revenue international publica- overall. ‘‘I think you squander your opportunity tions, argued that the in- when you spend a lot of time raising taxes a little bit come tax deters capital on very rich people,’’ he said. formation and makes it The income tax system cannot supply all the difficult to maintain a needed additional revenue, Graetz said. ‘‘I think competitive we’re going to need something higher than the rate in a globalized world historical average of revenue,’’ he said. ‘‘Is it 20 with mobile capital. The [percent of GDP]? Is it 21? I don’t know, but you are United Kingdom, for ex- putting a huge amount of pressure on the income Joseph J. Thorndike ample, has dropped its tax if you are going to rely only on the income tax, patent box tax rate to 10 or mostly on the income tax and payroll taxes, to percent, but some companies can find an even lower produce that much revenue.’’ patent box tax rate in the Netherlands, he said. In his book 100 Million Unnecessary Returns: A ‘‘To the extent you’re taxing capital, you cannot Simple, Fair, and Competitive Tax Plan for the United get away from this; you’ll never get away from it,’’ States, Graetz suggests adding a VAT to a reworked

TAX NOTES, March 4, 2013 1077 NEWS AND ANALYSIS individual income tax system, using revenue from ‘‘We’re never going to get real tax reform — the the VAT to exempt joint filers making less than kind of tax reform that solves big problems rather (C) Tax Analysts 2013. All rights reserved. does not claim copyright in any public domain or third party content. $100,000 ($50,000 for single filers) from the income than little, small problems — we’re never going to tax, and using payroll adjustments rather than an get that until we restore this faith in government, earned income tax credit. Graetz cited a 2012 report whatever that takes,’’ Thorndike said. from the Urban-Brookings Tax Policy Center and House Ways and Means Committee Chair Dave the Pew Charitable Trusts that said his plan would Camp, R-Mich., has released a discussion draft on require a VAT rate of 12.3 percent to pay for the how the United States can adopt a territorial system proposed exemption and would allow more than of taxation and a separate draft on the taxation of 100 million taxpayers to avoid filing a tax return. financial products. Camp and Ways and Means Mortimer Caplin, who served as IRS commis- ranking minority member Sander M. Levin, sioner during the Kennedy administration, argued D-Mich., have announced a set of bipartisan work- instead that every taxpayer should fill out a tax ing groups on tax reform, while Senate Finance return as ‘‘part of the price of citizenship.’’ He Committee Chair Max Baucus, D-Mont., is working agreed, however, that the United States may have to on a set of white papers on tax reform. Graetz adopt a VAT and cited a 1961 speech in which suggested that Camp’s and Baucus’s work will President Kennedy argued that a ‘‘strong tax system serve as a ‘‘gap filler,’’ because the White House and is essential to a strong democracy.’’ Treasury Department haven’t engaged much in the ‘‘The at that time had a tax reform debate. (Prior coverage: Tax Notes, Feb. different function,’’ Caplin said. ‘‘A lot of it was 18, 2013, p. 811.) really selling to the American public the importance of compliance with our tax laws.’’ Carbon Taxes A carbon tax could raise revenue in addition to the income tax, but Graetz urged lawmakers to consider a carbon tax only in the context of energy policy, not as a potential source of revenue. Given the regressive nature of the tax and proposals for refunds to lower- and middle-income earners, a carbon tax would generate less revenue than ex- pected, he said.

Given the regressive nature of the tax and proposals for refunds to lower- and middle-income earners, a carbon tax would generate less revenue than expected, Graetz said.

‘‘I think there is much less revenue for general purposes or for earmarking or whatever you want to do in a carbon tax than there is in a much broader-based consumption tax,’’ Graetz said. Goulder agreed, say- ing that a carbon tax ‘‘shouldn’t even be about the revenue; it should be about capturing the ex- ternality.’’

Robert Goulder

Partisanship and Tax Reform The panel agreed that the future of tax reform remains uncertain, pointing to the inability of law- makers to work together.

1078 TAX NOTES, March 4, 2013