Panel Tells Senate to Consider Value-Added Tax

Senate Finance Committee Chairman Max Baucus, D-Mont. opened the second in a series of Tax Reform hearings Tuesday with a quote from former President Dwight D. Eisenhower: “Neither a wise man or a brave man lies down on the tracks of history to allow a train to run over him.”  Baucus asked, “Why do we need tax reform?” as he introduced the hearing, “Does the Tax System Support Economic Efficiency, Job Creation and Broad-Based Economic Growth?”

Baucus (left) stated that tax reform is needed to “stimulate economic development, encourage business activity, promote fairness and certainty and minimize regulation.” He added that after “7.5 million lost jobs since beginning of the Great Recession, we need a tax code that puts Americans back to work.”

Last Thursday, a different expert panel urged the Senate Finance Committee to consider some controversial reforms in addition to cuts in spending, including elimination of the health care exemption and the mortgage deduction; a potential consumer, or value-added tax, and finally addressing the myriad issues of the alternative minimum tax. See “Tax Reform Panel Tells Senate to Eliminate AMT.”

‘First Do no Harm’

Sen. Orrin G. Hatch, R-Utah, the ranking Republican member of the committee, urged that tax reform“first do no harm.” He noted that the current tax code “creates jobs…for CPAs and tax attorneys.”   

The expert panel included Alan Auerbach, PhD, Robert D. Burch Professor of Economics and Law, University of California Berkeley;R. Glenn Hubbard, PhD, Dean and Russell L. Carson Professor of Finance and Economics, Columbia University Graduate School of Business; Dr. James K. Galbraith, PhD, Lloyd M. Bentsen Jr. Chair in Government/Business Relations and Professor of Government, The University of Texas at Austin, and son of the economist John Kenneth Galbraith; and an attorney, Michael Graetz, Isidor and Seville Sulzbacher Professor of Law, Columbia Law School.

Auerbach set the stageby outlining some of the most serious issues America faces, “veryhigh unemployment, and very high, growing national debt.” He added that “Tax reform is not necessarily inconsistent” with “continuing growth out of the recession. Additional economic growth can generate additional tax revenue. Given how desperately we need additional revenue, [we] need as efficient a tax system as possible—a bad tax system gets worse as we try to raise more revenue from it.”

Tax expenditures [are] somewhat controversial, Auerbach explained; it’s “worth asking if this provision, if it costs lot of revenue, is worth having.” The mortgage interest deduction is “not the worst example…we could promote homeownership much more cheaply than we do through the mortgage deduction,” which, he asserted, “leads to overinvestment in housing.”

On the corporate tax front, Auerbach recommended exploring a “lower corporate-tax rate, moving to a territorial tax system and paying by reducing corporate tax expenditures,” which may be “expensive or flawed.

Taxes and Economic Growth

“Tax policy has potential to change the country’s economic growth rate,” said Hubbard. “Many tax policies have been short term,” and we need a “long term” view to fix the tax code. “Higher investment can help reduce unemployment,” he said, adding that we need a “benchmark where income is taxed no more than once; [it] can be a consumption or income tax.”

Hubbard urged congress to “get depreciation right” for corporations…We also need a corporate-tax structure that would not continue to encourage leverage,” which “wouldn’t distinguish between debt and equity spending by corporations.”

“Focus first on corporate income tax, not that the U.S. statutory rate is too high,” said Hubbard, but consider a “territorial tax,” for corporations.

Regarding the “deficit—[if it is] principally outcome-dependenton economic performance, the goal should be to affect economic performance,” according to Galbraith. There’s “no such thing as neutral tax. The tax reform act of 1986 [was a] remarkable reform, an adroit bipartisan effort that saved the income tax.”