A single, low rate also would be more "progressive," increasing the share of taxes paid by upper-income individuals. While steeply graduated rate schedules may look "progressive" on paper, they create disincentives to work, save and invest, which affect the rich the most. Steeply progressive tax rates raise less revenue from the rich than low, single-rate systems. Since the Bush tax-rate reductions on capital gains and dividends, the share of total taxes paid by the rich rose. Paradoxically, if you want to "soak the rich," lower the tax rates.
Now we await chapter three in the book on tax reform, the report of Bush's Federal Advisory Panel on Tax Reform co-chaired by former Sens. Connie Mack and John Breaux. While the president instructed that reform options should increase economic growth, the panel has been handcuffed by not being allowed to take the growth effects of their recommendations into account when calculating the revenues generated by the reform, which means tax rates must be much higher than really necessary.
One of the Advisory Panel's recommendations is not really its own but rather the fulfillment of the president's mandate in his executive order creating the panel to "use the federal income tax as the base for its recommended reforms." This option, by definition, fails the test of the Kemp Commission by attempting to salvage the unsalvageable, leaving in place most of the distortions in the current tax code. This option also fails to reduce the top marginal tax rate of 35 percent and maintains a steeply graduated rate structure, incentive crushers both.
I was disappointed that the panel decided to offer the president only one additional option, which the panel misnames the "Progressive Consumption Tax." It begins from one of the model tax systems explored in the blueprints - the so-called Bradford X-Tax on consumed income - but immediately distorts it by imposing an additional level of taxation on saving, investing and entrepreneurial risk-taking. It also fails the tax-rate criterion laid down by the Kemp Commission by maintaining a steeply graduated tax-rate schedule with an inordinately high top rate of 35 percent. Even John Maynard Keynes maintained as a general principle that tax rates should not exceed 25 percent.
Bush has said he will make tax reform a top domestic priority next year. Before he makes a decision on which particular reform measure to send to the Congress, I hope he not only reviews the work of the Treasury blueprints, the Kemp Commission and his own Advisory Panel but also reaches beyond these sources. I urge him to consider all the pure and hybrid tax systems identified as economically equivalent, any one of which would be vastly superior to the existing system, before making his decision.
Finally, in devising a legislative proposal to send to Capitol Hill, I hope the president resists the temptation to pre-negotiate with himself. Compromise is an essential ingredient of the legislative process, so it is vitally important that the president provide the Congress the best possible proposal from which to begin the inevitable negotiations.