October 18, 2011
Give an economist a clean slate, unencumbered by political ideology or allegiance, and charge him or her with designing an ideal tax system. What emerges will look nothing like the dysfunctional personal and corporate tax codes now administered by the IRS. Instead, it could resemble Larry Kotlikoff’s “purple tax plan,” an economic reform plan he designed to appeal to both Democrats and Republicans alike.
Tax code reform has grabbed voters’ interest in the upcoming election. Herman Cain’s surge in the polls among Republican candidates owes in part to his “9-9-9” plan, which would impose 9% taxes on personal income and corporate profits, along with a 9% sales tax.
Kotlikoff, a Boston University professor of economics and a columnist for Bloomberg, described his purple tax plan to me during a breakfast meeting last week. Cain’s plan is interesting and merits careful study, according to Kotlikoff, who has his own political ambitions. “I believe my purple tax plan is more progressive, will generate more revenue, is generationally more equitable, and has better work incentives,” he said. “But I have to do my homework on this.”
The three elements of Kotlikoff’s purple tax plan
The ideal tax code would eliminate the regressive provisions in the current tax code, such as the payroll tax, which poses the greatest burden to poor people. Kotlikoff wants it to be simple, too, and so he advocates eliminating the federal personal income tax, corporate income tax and the estate tax.
He would keep a 15% payroll tax, but he would make it progressive by eliminating the ceiling (which is currently $106,800) and exempting the first $40,000 in the employee portion of the tax.
Kotlikoff also wants to tax consumption, indeed every dollar of consumption as defined by our national income accountants. He’d do so by implementing a 17.5% retail sales tax on all goods and services and tax the consumption services (what economists call “imputed rent”) we derive from the use of our home, car, plane or boat. Essentially, this tax would be based on what it would cost someone to use (“rent”) those assets and would be collected just like a local annual property or excise tax.
Kotlikoff said 17.5% is the nominal rate, but the effective rate is 15%. For every dollar someone spends at the store, they will pay 15 cents in taxes and will receive 85 cents in consumption goods and services. If you divide 15 cents by 85 cents you get back to the nominal 17.5 percent rate. But the bottom line is that out of each dollar you have to spend, whether it’s a dollar of wages or wealth, you’re effectively surrendering 15 cents.
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