Newsweek and Paul Ryan Have Similar Tax Reform Ideas

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Newsweek's Evan Thomas and Keith Libbey have proposed a brand new tax system that would dramatically slash federal income tax rates, wipe out deductions and exemptions, and institute a value-added tax.

Remind you of anything? Republican Rep. Paul Ryan's much praised/criticized/ballyhooed Road Map did three basic things. It simplified the tax code, wiped out all deductions and exemptions, and instituted a value-added tax.

Now, I'm not accusing anybody of ghostwriting. There are also some big differences. Ryan's plan cut taxes dramatically for the rich, whereas Thomas and Libbey say their plan increases the progressiveness of the tax code. Ryan would eliminate capital gains and business income taxes, whereas Newsweek would merely cut them. Ryan aims to haul in taxes worth 19% of GDP exactly (just north of our historical average), whereas Thomas and Libbey sound like they're trying to raise even more money. Ryan's plan would slap a 8.5 percent consumption tax on goods and services, and Newsweek's tax would be 12 percent.

Stop right there. That's a huge new tax. In conversations with the Tax Policy Center, I've heard that an 8 percent VAT is on the high end of what we could realistic slap on top of our tax code. A 12 percent VAT would take us from being the only country without a broad federal consumption tax to a middle-of-the-pack country, with VAT higher than Japan, Canada or Switzerland, and just below the UK and Spain.

Thumbnail image for VAT OECD.PNG

It's great to see Newsweek getting into the tax reform game. Eliminating the need to file returns is an inspired touch. But it ain't easy being a purist.

For example, Thomas/Libbey say they want to eliminate all deductions. But they also suggest an exception for charities and savings plans. Right there, we lose $150 billion, or nearly 20 percent of all dreaded "tax expenditures." If they also decided to keep safety net measures like the earned income tax credit and the child credit (it's hard to see those going away, really), that would cost the government another $80 billion.

Or consider the VAT. Taxing spending is regressive, because the poorer spend a greater portion of their income. So the authors allow that "the poor and the very old may need at least partial reimbursement." That's the right idea, but it's billions of dollars more that we're leaving on the ground.

Like Ryan's tax plan, this column raises as many questions as it answers. But that's a good thing. Thomas/Libbey should be commended for thinking big and not being afraid to wonk out for their readers.

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Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

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