Who Would Have Guessed? Bipartisanship on Tax Reform.
By Mark Bloomfield
Published in Wall Street Journal’s Think Tank
The Senate Finance Committee announced Wednesday that five bipartisan working groups had completed reports analyzing the tax code and ways to make it simpler, fairer, and more efficient. It’s rare that Democrats and Republicans find common ground on any major issue in Washington, but on tax reform it is monumental. Business groups, interest groups, and other stakeholders in today’s system are scouring the reports to identify winners and losers among the recommendations.
Amid the many pages was a nugget that could have big ramifications for tax policy, the 2016 presidential election, and the economy.
Sens. Ben Cardin (D., Md.) and John Thune (R., S.D.), the co-chairmen of the working group in business income, note on Page 40 of their report to the Finance Committee: “Making a fundamental shift to consumption-oriented taxation is a major change that may not necessarily be undertaken in the near term. However, given the pro-growth effects of consumption taxes, the working group believes that the issues above and consumption-based tax systems in general deserve the attention of the committee as tax reform efforts continue.”
These few words confirm the consensus of many mainstream economists: A consumption tax produces more growth than an income tax.
The need for pro-growth solutions to economic malaise has reached global levels. Greece is desperate to find a way out of its austerity and bailout policies and to put itself on a path that creates jobs and growth.
Here at home, the need for economic growth to revive our still sluggish economy has transcended party lines. Hillary Clinton has stumped on it. Senators from across the political spectrum, including Ben Cardin, Rand Paul, Mike Lee, and Marco Rubio, have proposed versions of a consumption tax. Unlike the stigmatized European VAT, Sen. Cardin has proposed what he calls a “progressive consumption tax.” Sen. Paul suggests a “business activities tax.” The business-income working-group report says the joint reform plan of Sens. Rubio and Lee “contains several provisions that would shift the tax code in the direction of a consumption tax.” On the business side of the Rubio-Lee plan, capital investment would be immediately expensed. On the individual side, investment income from capital gains, dividends, and interest would be tax-free.
This is not about importing a European-style VAT. Progressives, tea-partyers, and all points in between could craft a consumption tax tailored to the political, cultural and economic needs of our country.
To address conservatives’ concerns that traditional VATs pull in too much revenue for government coffers, Sen. Cardin proposes a rebate to taxpayers if revenues from a consumption tax exceed 10% of the economy. To counter charges of a “tax on the poor,” Sen. Paul would repeal the regressive payroll tax paid by the working poor and exempt from income tax the first $50,000 of wages.
These proposals capture the spirit of Ben Franklin’s admonition that a penny saved is a penny earned, while working around European pitfalls.
As Sens. Cardin and Thune noted, a consumption tax is unlikely to be adopted in the near term. But the 2016 presidential election may be the first and best chance to build a true mandate for tax reform, particularly for Republican candidates looking for a way to stand out in a crowded field.
Mark Bloomfield is president and CEO of the American Council for Capital Formation and co-authored “The Consumption Tax: A Better Alternative?” He is on Twitter: @MrCapitalGains.