Tax reform for Democrats

Why do I find this post from Robert Reich via Mark Thoma infuriating? It's Reich's second sentence regarding the idea of a carbon tax:

I can’t imagine any politician calling for higher taxes affecting the middle class, or for that matter the middle class – already squeezed by high energy prices and stagnant wages – putting up with it.

Listen, everything of significance Democrats want - universal health care, an attack on global warming, you name it - is going to cost money. If you can't sell the public on the costs, you're not going to be able to sell them on the program. Reich's preference for auctioning off the right to pollute (which is really indistinguishable from a cap and trade system where the permits are auctioned off) imposes costs on polluting companies, which will pass them on to consumers. And if those costs are not immediately apparent to middle class voters, I'm sure enterprising politicians on the other side of the debate will bring those costs to their attention.

I'd like to see a Democratic candidate come out with a tax reform package which, he or she would explain to the voters, would serve a number of purposes:

1. Raise enough revenue to fund current spending - specific expenditure items the candidate can identify that should be cut + all the new programs the Democrats will propose. To be specific, current spending is about 20% of GDP. You could probably reduce that by 1% of GDP by cutting some of the fat that the Republicans have tacked on in the last few years, then add back - what - 5 or 6% of GDP to cover health care. So we'll raise revenue equal to 25% of GDP.

2. Raise revenue in a way that discourages harmful activities (pollution) and encourages helpful ones (work, saving). In so doing, it contributes to economic efficiency.

3. Simplifies the tax code and makes it fairer in the sense that people in equal economic circumstances pay close to the same amount in taxes.

4. Retains (maybe increases) the progressivity of the current system.

What kind of tax reform does all this? A progressive, "green" consumption tax, that's what. My tax reform package would include:

- a value added tax with a special high rate for carbon-based energy inputs
- a lump sum transfer payment to all Americans to guarantee that people earning under say $20,000 per year don't pay any more under the new system than they do under the current system
- abolition of income, payroll, and corporate taxes
- a special surtax on incomes earned by the filthy rich (say, those earning more than $1 million a year).

My candidate goes around the country touting the benefits of this package to the public in general and various constituencies in particular. The plan has a carbon tax, so it forms the linchpin for an attack on global warming. It taxes consumption rather than income (for the vast majority of us) so it should get support from supply-side Republicans. (Slogan: government should tax you based on what you take out of the economy, not what you put into it.) It abolishes the payroll tax, which is horribly regressive and probably discourages companies from hiring low-wage workers; at the same time, I'd fold the financing of Social Security into general revenues rather than using a dedicated tax, thus solving the Social Security "crisis" (which is an accounting fiction anyway). No one earning under $1 million a year has to fill out a tax form under this plan. Those earning over $1 million a year can hire accountants to do it for them. Tax evasion is vastly reduced. All the distortions associated with the corporate tax are eliminated (double taxation of dividends, to the extent that that's a real problem; more importantly, all the money and time companies spend cooking the books to avoid the taxes, lobbying and bribing Congress for special tax breaks, and so on).

The strongest opposition would probably come from the candidate's Democratic Party primary opponents. The minute they hear "consumption tax" the daggers will be drawn. He/she would have to work hard to emphasize the progressive nature of the package: people earning under a certain amount are fully compensated for the tax via the lump-sum rebate; the rich still get socked with an income tax. If the primary voters can be convinced, this puppy dog sails through Congress and provides a sound base for government finance for the next generation.

Others have already worked out many of the details of this type of tax plan. I'm sure the numbers can be made to add up. It's a winner, people!