WASHINGTON IS short on fresh thinking about almost everything, taxes and tax reform very much included. So it was encouraging to see Maryland’s junior U.S. senator, Benjamin L. Cardin (D), promoting a plan to overhaul the tax code that is nothing if not radical. Though imperfect, and unlikely to pass Congress any time soon, Mr. Cardin’s plan deserves to be taken seriously by anyone searching for a way out of the blind alley that is the current partisan discussion of fiscal issues.
[Reposted from The Washington Post | Editorial Board | February 23, 2015]
The key concept of Mr. Cardin’s proposal is a massive shift in taxation from household and corporate income to consumption. Levied on all purchases of goods and services, from the time they are created to the time they reach their end user, the consumption tax would be set at 10 percent; it resembles the value-added tax in the rest of the developed world. Mr. Cardin would offset its inherent regressivity by eliminating income taxation for all households earning less than $100,000 and individuals earning less than $50,000, with added rebates to assist families with very low income. The upper-income minority would face three income tax rates — 15 percent, 25 percent and 28 percent — with just four deductions (charity, mortgage interest, state and local taxes and health and retirement benefits). The corporate tax rate would drop to 17 percent.
This would eliminate income tax filing for most Americans. It would also render all savings tax-free, ridding the need for complex targeted vehicles such as individual retirement accounts. The Cardin system would encourage U.S. exports, since the consumption tax would be rebated on sales of products or services to foreign markets. To prevent the system from turning into a cash cow for ever-expanding government — a frequent, and reasonable, conservative criticism — Mr. Cardin would require the return to taxpayers of any revenue it generates beyond 10 percent of gross domestic product.
Though Mr. Cardin is a Democrat, his proposal has a Republican pedigree: It resembles a plan outlined by Michael Graetz, a Columbia University law professor who helped the Reagan administration develop the last major tax reform in 1986. It reflects that the 1986 paradigm — a grand swap of fewer loopholes for lower rates — may no longer be politically or fiscally practical.
To be sure, the proposal may be even more radical than Mr. Cardin acknowledges; taxing consumption and promoting exports could end the United States’ long-standing role as an engine of consumption-led growth, with highly unpredictable consequences for the world economy. Additionally, a 10 percent-of-GDP limitation on consumption tax revenue would build a floor below which federal revenue could not go. Still, Republicans inclined to squawk about that should recall that even Rep. Paul Ryan’s (R-Wis.) 2011 budget plan wouldn’t have reduced federal spending below 19 percent of GDP until 2040, according to the Congressional Budget Office.
Neither the GOP nor the Democrats have found a mutually agreeable way to enact a 1986-style reform. If nothing else, Mr. Cardin’s proposal reminds both parties that they have alternatives.