Tax Analysts Blog

Does the United States Really Need a Tax Revolution?

Posted on Feb 24, 2015

"The art of taxation consists in so plucking the goose as to obtain the largest amount of feathers with the least possible amount of hissing."
Jean-Baptiste Colbert, French minister of finances, 1665-1683.

Louis XIV created the modern French state and laid the template for 17th- and 18th-century absolute monarchies primarily to increase his own personal power and create an infrastructure to support military and territorial expansion. Scarred by a youth spent under a regency, the Sun King was determined to institute and maintain direct rule, while at the same time turning France into the arbiter of Europe. It was Colbert's task to find the money for it.

Colbert and his successors under Louis XV and Louis XVI, of course, failed. The enormous bureaucracy and war debt built up from Louis XIV's personal reign in 1661 to the end of the American Revolutionary War in 1783 crippled French finances. By the 1780s, service on the state debt amounted to over 50 percent of ordinary French revenues, and the kingdom was running a deficit that at times was over 20 percent. Most people know the rest of the story: Louis XVI summoned the Estates General in 1789, almost immediately lost control of the situation, and was executed in 1793 by the French Republic born out of the world's most famous revolution.

The republic and its successor, Napoleon's Empire, completely overhauled the nation's tax system. Louis XVI might have wanted tax reform to close the deficit and tweak government debt payments, but what France got was a complete tax revolution. Exemptions based on birth and status were abolished, more efficient direct taxes were introduced, the practice of tax farming was ended, and the myriad layers of taxation introduced by royal finance ministers to pay for wars were consolidated. Is there a lesson in this history for the 21st-century United States?

Some say yes. At a recent conference discussing Senate Finance Committee member Benjamin Cardin's proposed VAT, Columbia Law School professor Michael Graetz said that "'’86-style tax reform is inadequate to meet the challenges of a 21st-century economy" and that "we are at the point where we need an overhaul, not an oil change." Tax Analysts' Martin Sullivan echoed that point this week, saying it is time to look beyond mere tax reform that plays with rates and broadens the base. Sullivan and Graetz believe the United States must move away from its income-tax-based revenue regime to something that incorporates greater consumption taxation. Cardin's complicated plan would introduce a 10 percent VAT, while cutting the top corporate rate to 17 percent and the top individual rate to 28 percent. The senator also uses a weird "circuit breaker" mechanism to answer concerns that a VAT would be a money machine and "prebates" to address the regressivity of a VAT. Cardin is far from alone in thinking that the United States will have to adopt some kind of a VAT.

But the United States is far from 18th-century France. The nation's long-term budget picture is gloomy because of rising entitlement spending, but doesn't that seem more of a spending than a taxing problem? U.S. government debt right now is just under 75 percent of GDP. The Congressional Budget Office projects that in 2025, it will be 79 percent of GDP. The deficit in 2015 will be 2.6 percent of GDP. In 2025 it is projected to be 4 percent of GDP. Interest expense on the debt is about 6 percent of the budget. Those are concerning, but hardly catastrophic, figures.

The Obama administration has dramatically increased U.S. government debt and run historic peacetime deficits. And the nation's revenue system has seemed a bit antiquated when confronted with issues of base erosion, profit shifting, and the proliferation of passthrough entities. But the income tax is hardly obsolete. Those who say that tax reform doesn't go far enough and that the nation needs a revolutionary change are probably overstating the problem. Unlike Ludovican France, however, the United States still has plenty of time to confront its situation, and it is highly likely that tweaks to international source rules, slowdowns in or cuts to entitlement spending, and perhaps changes to how capital is taxed could help solve the nation's budgetary problems.

Read Comments (3)

robert goulderFeb 23, 2015

Well said, Jeremy.

Regarding consumption taxation: I've often wondered why those on the right so
vigorously oppose VAT, given that (relative to income taxation) VAT is
pro-savings, pro-investment, and pro-growth. Economists and academics on the
right understand this perfectly well, that's clear. It's only the right's
political chattering class that seems unable to connect the dots.

Many in Washington are keen to place 'global competitiveness' on the high altar
and preach that it's the underlying goal of tax reform. Point taken. I happen
to agree. Well, guess what people? The Cardin bill is what global
competitiveness looks like.

I suspect a lot of people are hung up on the fact Cardin is Democrat, which is
unfortunate. A good idea remains a good idea regardless of who raises it.
Cardin should find a GOP co-sponsor.

When viewed seriously, we face three options: (A) tax reform that closely
resembles the Camp bill; (B) tax reform that closely resembles the Cardin bill;
or (C) maintain the status quo, do nothing, and forget about tax reform
altogether. [This assumes we're limiting the field to options that are revenue
neutral and distributionally neutral.] If one is serious about enhancing our
tax system's global competitiveness, the choice is rather obvious. Options A
and C simply can't get us there.

travis rechFeb 24, 2015

I'm fairly shocked conservatives aren't embracing a VAT tax along with lower
income tax rates scheme. It seems highly beneficial to the political donor
class, so I am puzzled why it isn't so appealing.

edmund dantesFeb 24, 2015

Don't be so surprised that conservatives--and everyone else--declines to accept
a large new tax in exchange for lower income tax rates. We've seen this movie
many times before, it always ends badly, notably in 1986. Lower rates were
traded for a broader base. The lower rates were temporary, the broader base
permanent. Same thing happened in CT, when an income tax was adopted on the
promise of a reduction in the sales tax. That was the beginning of the end of
CT's prosperity.

How about we go after some of the real sacred cows, instead? The cows so
powerful that they don't even enter the tax reform discussion, which is always
about mortgage interest deductions. How about we start taxing muni bond
interest? How about we start taxing the mega-endowments of the universities?
How about we put a cap on the unlimited charitable deduction for estate and
gift taxes? These are the things most dear to the wealthiest.

There's a lot of revenue to be had, if we are serious about it.

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