Oct 20 2005
Preview of Bush’s Tax Reform Plans
Prof. Edward Lazear gave a seminar tonight on campus. The subject is President’s upcoming Tax Reform proposal.
Lazear is a Stanford professor and Hoover fellow. He has a loaded bio and a seat on President’s new advisory Tax Reform Panel.
Tax Reform is part of the pro-savings, pro-investment campaign by GWB administration. The rationale, based on my feeble macro-economics understanding, is that consumption is driving up the current account deficit. Also heard arguments as more savings and investments (one and the same) will keep inflation in check and create more jobs. Not sure why capital investments won’t cause material shortage or consumer demand will not create jobs.
Things caught my attentions:
1. Eliminate AMT
2. Reduce number of examptions (healthcare, mortgage rate, etc.) Roll them into credits instead.
3. Drastically cut capital gain tax: no tax on dividends, only tax 25% of stock gain, for example.
4. Reduce corporate rate.
5. Allow everyone to open up to 3 tax-deferred accounts: savings, retirement and healthcare (to replace 401K and the likes). A married couple could save A LOT ($60K+) a year.
6. There are two reform proposals: one is called the “Simple” plan, the other the “Progressive”.
7. Not sure the difference between the two. Had the impression that the “Simple” plan will cut 50% of tax filing efforts, and there is a “consumption tax” in the “Progressive”.
8. Each plan includes changes to both personal and corporate tax codes.
9. Supposedly, the effect of such changes is tax revenue neutral and keeps the same tax burden to all tax payers (i.e. the poor vs. the rich) as today.
My impressions:
1. This is a very complicated set of changes. Again, I have to confess my lack of domain knowledge. But I am not convinced by his repeated assurances that they are simple and straightfoward.
2. Lazear has a very sharp mind and commanding knowledge. There is no a hint of hesitation in any of his answers. He constantly assured the audience that most economists or experts agreed with him on this and that.
3. I don’t trust this proposal: the salesman too slick and the arguments underwhelming. Here is why:
a. In a zero-sum game (revenue neutral), how can one pro something without taking away something else from others? It may be so in the short run as the economy is absorbing the changes. In the long run, there has to be winners and loosers.
b. One of the changes is called “border adjustment” which taxes import (for consumption) and gives credit to export as if they offset each other through currence exchange. To me they are just new names for tariff and subsides! I asked him whether WTO may find this troublesome, he admitted as much but still said it was “negotiateable”. After the conversation, I really have doubts of his idea of “fairness”.