NYTimes: “1% and That 15%,” editorial, 01/19/12

At a time when the U.S. economy needs serious restructuring, the Republican candidates for president are vying for the position of who will cut taxes the most if elected.  They are calling for tax cuts at a time when government expenditures are 40% higher than revenues.  No one really believes that manageable cuts to defense, medicare and social security can shrink that 40% deficit gap by half.  Nor has deficit spending successfully grown the economy and increased employment in the last several years.

After all politically practical cuts are made to spending, taxes will still need to rise.  Republicans will argue that lowering taxes will boost economic growth and obviate the need for additional tax revenues.  There is no such evidence.

Candidate Romney appears to be headed for the rocks over the coming disclosure of his tax returns and the risk of public focus on his low tax contributions relative to income.  In its editorial, today, the NYTimes speaks to the larger problem: “The controversy over the tax treatment of carried interest is a subset of the larger debate over whether there even should be a preferential rate for capital gains. The answer is no. It is not only excessive, and unjustified, it actually encourages wasteful gamesmanship, by enticing people to engage in tax avoidance schemes to convert ordinary income into capital gains. It also exacerbates inequality and crowds out other ways to foster risk-taking.”

Campaign apologists will spin that Romney’s firm paid Corporate Income Tax and that his 15% is a double-tax.  If that is what they really believe, then they should very well support replacing the CIT by a VAT, which would eliminate the double-taxation of dividends.  The VAT implemented with zero tax preferences would also eliminate the gamesmanship in lobbying for loopholes.

Sweeping tax reform that includes replacing the Corporate Income Tax with a VAT as one component would have a positive effect on exports, domestic production and jobs.  VAT is used by all our trading partners, including China, to exclude the cost of government from the price/value relationship of goods and services in international trade.  It is border-adjusted, i.e., subtracted from exports and added to imports.  Replacing the CIT would encourage the return of multi-national profits now parked in lower taxed countries, and stimulate foreign investment.  Imports would carry an equal burden, and domestic goods would be more competitive.

As Mitch Daniels once suggested, couple the VAT with zero tax preferences with a zero deduction Personal Income Tax with a high threshold and progressive rates and we will have a tax system that is fair, competitive, and stimulative for jobs and growth.  Mitt Romney would pay a much higher, but fair tax.