Readers are strongly advised to fasten their seatbelts before continuing. You've been warned.
On CNN's Fareed Zakaria GPS Sunday, the perilously liberal host actually complained about America's tax code being too progressive while noting, "The top ten percent in America pay a larger share of total taxes, 45.1%, than do the top ten percent in any of the 24 countries examined" (video follows with transcript and commentary):
FAREED ZAKARIA: For those who despair at the role of money in politics, the simplest way to get the corruption out of Washington is to remove the prize that members of Congress give away - preferential tax treatment. A flatter tax code with almost no exemptions does that.
You heard right. Fareed Zakaria on Sunday called for a flatter tax code. I told you to fasten your seatbelts. Now I'm advising you leave them on:
ZAKARIA: The simplest fix to our tax code would be would be to lower the income tax dramatically, lower the corporate tax, and instead raise revenues through a national sales tax, or a value-added tax (VAT).
Yes, he said "lower the income tax dramatically, lower the corporate tax."
Now I know what you're thinking: the catch is the VAT. However, as he noted, a mixture of a flatter tax with a VAT would be far less progressive than what we currently have:
ZAKARIA: The U.S. is the only rich country in the world without a national sales tax. Germany has one at 19%, Britain at 20%, Korea at 10%.
What’s the appeal of a consumption tax?
First, it is efficient. Most studies, including one by the Internal Revenue Service (IRS), suggest that the federal government loses several hundred billion dollars a year to tax fraud. This is much tougher to pull off with a consumption tax. Second, it provides the government with a more stable form of revenue than income taxes. Income taxes fluctuate greatly between boom and bust years. Third, American’s consume too much, often using credit and leverage to do so. A consumption tax would moderate this behavior. Government will always get less of a behavior it taxes and more of what it subsidies.
Actually, I disagree that a VAT would reduce the government's revenue risk in a recession. If you're relying on taxes from consumption, consumer spending drops more in a downturn than wages. So, this might be a weak point.
But who cares? This was Zakaria making far more sense than normal. Keep those seatbelts on:
ZAKARIA: Ironically, the heavy reliance on income taxes makes the American system more progressive than those in Europe. The federal government gets about 43% of its total tax revenue from taxes on individual incomes and profits, compared with only 29% in Germany and 22% in France. The balance for France and Germany comes from the VAT, which is highly regressive. One recent OECD study showed that the top ten percent in America pay a larger share of total taxes, 45.1%, than do the top ten percent in any of the 24 countries examined. In Germany they pay 31% of the taxes, in France 28%.
But the best thing about tax reform is that it kills corruption. So if you ask me what kind of tax code I am in favor of, I am in favor of almost any new tax code that fulfills one requirement: It should fit on two pages.
This warrants repeating:
"Ironically, the heavy reliance on income taxes makes the American system more progressive than those in Europe...One recent OECD study showed that the top ten percent in America pay a larger share of total taxes, 45.1%, than do the top ten percent in any of the 24 countries examined. In Germany they pay 31% of the taxes, in France 28%."
So Zakaria wants America to have a less progressive tax structure where the rich pay a smaller part of the total collected than they currently do and those at the bottom pay more.
Tough to believe, isn't it? On the other hand, doesn't it depend upon which part of the fix comes first?
If we first create a VAT, does anyone think the next step will be to "lower the income tax dramatically" and "lower the corporate tax?"
No chance, right?
As such, Fareed, I'm all for your tax reform proposal if you start by lowering income and corporate taxes dramatically. Only then can you add your VAT.