A few annotations to this week’s Chronicle Review primer on tax policy and presidential politics:
1. Consumption taxes. Mike Huckabee, Ron Paul, and Mike Gravel have endorsed a consumption-tax plan known as the FairTax, which would replace federal income and payroll taxes with a sales tax on all products and services. (Huckabee, who sometimes rips up IRS forms during his stump speech, has likened the FairTax to “a magic wand releasing us from pain and unfairness.”)
In December the conservative economist and freelance writer Bruce Bartlett published a 14-page critique of the FairTax, arguing, among other things, that it is extremely difficult to enforce taxes on services. (He also mocks proponents’ notion that new houses, but not existing ones, should be subject to the tax when they are sold. “It could be many years before a new home is built in America if the FairTax takes effect,” he wrote.)
In a column last month, Berkeley’s Brad DeLong argued that the FairTax would be regressive and unenforceable, but that it’s more intellectually honest than the supply-side-flavored fiscal policies put forward by Mitt Romney and John McCain.
Laurence Kotlikoff, a FairTax advocate who teaches economics at Boston University, replied to Bartlett here, and has also published a brief argument about why liberal Democrats like DeLong should embrace the FairTax.
Meanwhile, Cornell’s Robert Frank has proposed a ”progressive consumption tax,” under which people would file standard income-tax returns but would be able to exempt any income they saved during the year. Such a system, Frank argues, would help to cure “luxury fever” and give wealthy Americans new incentives to save and invest.
And Yale’s Michael Graetz, who’s quoted extensively in our primer, has called for a European-style value-added tax and the elimination of the income tax for families earning less than $100,000.
2. Supply-side fiscal policy. Certain Republican candidates have come under fire for promising a free lunch—that is, for suggesting that tax cuts will always and everywhere pay for themselves.
The vast majority of economists have rejected that idea. But the Center for Freedom and Prosperity, a free-market think tank, has just released a video that promotes a weaker version of the supply-side claim. Few tax cuts fully pay for themselves, it argues, but many tax cuts produce positive revenue feedback:
In the United States today, however, where marginal tax rates are already low, are there many feasible tax cuts that would actually generate that sort of positive feedback? Many scholars say no. See this post, by the University of Arizona’s Lane Kenworthy, and this column, by the University of Chicago’s Austan Goolsbee, who is an adviser to Barack Obama.
Last but not least: A small contribution to the annals of American country music, featuring the supply-side guru Arthur Laffer.
(Photo by the Flickr user rachaelvoorhees. Used under a Creative Commons license.)
