Supercommittee Is a Chance For Tax Reform

Hugh Hewitt

8/12/2011 10:41:00 AM - Hugh Hewitt

The "Super Committee" of six senators and six House members can propose whatever it wants to their colleagues, and those proposals are guaranteed an up-or-down vote by both chambers? No amendments. No filibuster. no kidding.

Everything really is on the table, and the ordinary rules of lawmaking are suspended.

Would you trade cuts in the income tax and corporate tax rates in exchange for a national sales tax?

Don't make a counter offer, just consider the basic proposition: Would it make more sense to raise federal revenue from sales taxes, income taxes, or a mixture of both?

The most disturbing aspect of our current income tax system is that more than a majority of Americans pay no income taxes at all. These citizens can afford to be indifferent to the size and cost of the national government because, outside of payroll deductions, they are not paying any portion of their income to the Feds. In fact this 51% have every incentive to demand more in the way of services and transfer payments because they aren't picking up even a tiny fraction of the costs.

By contrast, a sales tax would fall on every consumer, and if that tax had to be raised to cover the bill, taxpayers across the entire economic spectrum would be obliged to ask whether the services being rendered were equal to the cost in sales taxes paid.

As the new "Super Committee" of 12 sets to it's work it confronts a unique opportunity to rethink the basic approach to federal taxation. Whether it proposes an overhaul depends on many factors, but it ought to at least consider the upside to slashing rates on income, both personal and corporate, and introducing a national sales tax to make up for those lost revenues.

Most of the "tax reform" debate has focused on limiting or eliminating the big three deductions --those for home mortgage interest, charitable giving, and state and local taxes.

To tinker with any of the three is to set off potentially catastrophic economic consequences by crippling home values, or the fiscal integrity of the not-for-profit sector, or the economies of high tax states which would see out-migration soar if the internal revenue code stopped giving their residents a break.

The dozen legislators tasked with presenting a plan for escaping out fiscal nightmare should ask some of their staff to skip those stale debates over this deduction or that subsidy and to instead game out the move to a new system.

If, for example, a 3% sales tax on all goods and services would yield enough revenue to cover the cost of 10% cut in all personal income tax rates, halving the corporate tax, and ending the death tax for good, would you applaud or boo? What if a 5% federal sales tax allowed all of that and for the retirement of the debt over a reasonable period of years?

Because incentives impact behaviors, the move from a tax on income to one on consumption would of course increase the former and decrease the latter. Opponents of a federal sales tax fear that Democrats would simply impose a sales tax in addition to high marginal rates on income, but that is a political fear not an economic argument. The key question for the committee is what is the best approach right now, not the best approach considering the political debates of the next generation.

While going about their big think on the economy, the Super Committee would also be well advised to look at the retirement savings system and the wisdom of keeping the seven trillion in assets tucked away, arbitrarily restricted in their uses. Americans can use their retirement accounts to buy stocks and bonds, but not houses and only rarely businesses. Allowing penalty- and tax-free use of these assets to pay off mortgage debt would assist in ending the foreclosure bulge by allowing the deployment of personal savings to protect most Americans' biggest assets.

Other areas of potentially breakthrough innovation are open to the Super Committee but time is short. There really is a chance to fix Social Security, Medicare and Medicaid, protect the national security and unleash American productivity and innovation, but all the usual suspects will be urging higher tax rates as the only solution.

Pray that the Super Committee doesn't blow it's unique opportunity to make a new start, one that encourages growth for every American rather than pitting rich against poor.