Tax and Social Security Reform: Thinking Outside the Box
Thursday, September 29, 2005
by Hans Fehr, John C. Goodman, Sabine Jokisch, Laurence J. Kotlikoff
Table of Contents
- Executive Summary
- Introduction: Five Radical Reforms
- The U.S. Tax System: The Case for Reform
- Elderly Entitlements: The Case for Reform
- Modeling the Effects of Tax Reform
- An Eleven Percent Flat-Rate Income Tax
- A Flat Rate Consumption Tax
- Combining Tax Reform and Social Security Reform
- About the Authors
- Alan Auerbach, “Tax Reform, Capital Allocation, Efficiency, and Growth,” in Aaron and Gale, eds., Economic Effects of Fundamental Tax Reform (Washington, D.C.: Brookings Institution Press, 1996).Cited in June O’Neill (director), “The Economic Effects of Comprehensive Tax Reform,” Congressional Budget Office, July 1997.
- Don Fullerton and Diane Lim Rogers, “Assessing the Effects of Fundamental Tax Reform with the Fullerton-Rogers General-Equilibrium Model,” Joint Committee on Taxation, January 1997.
- Dale W. Jorgenson and Peter J. Wilcoxen, “The Long-Run Dynamics of Fundamental Tax Reform,” American Economic Review, Vol. 87, No. 2, 1997.
- June O’Neill, “The Economic Effects of Comprehensive Tax Reform,” Congressional Budget Office, July 1997.
- Jason J. Fichtner, “A Comparison of Tax Distribution Tables: How Missing or Incomplete Information Distorts Perspectives,” Joint Economic Committee of Congress, December 2003, Chart 1.
- Tax Foundation, “Summary of Federal Individual Income Tax Data, 2002,” updated October 20, 2004.
- See “Women as Taxpayers,” John C. Goodman and Celeste Colgan, Women in the 21st Century (Lanham, Md.: Rowman & Littlefield, 2005 forthcoming) and Edward J. McCaffery, “Women and Taxes,” Celeste Colgan, ed., Women’s Agenda (Dallas, Texas: NCPA, 2002).
- Stephen J. Entin, “Reducing the Social Security Benefits Tax,” National Center for Policy Analysis, Brief Analysis No. 337, August 10, 2000.
- Bruce Bartlett, “Taxing the Poor,” National Center for Policy Analysis, Brief Analysis No. 174, September 14, 1995.
- “Women as Taxpayers,” John C. Goodman and Celeste Colgan, Women in the 21st Century (Lanham, Md.: Rowman & Littlefield, 2005 forthcoming).
- Jagadeesh Gokhale, Laurence J. Kotlikoff and Alexi Sluchynsky, “Does It Pay to Work?” National Center for Policy Analysis, Policy Report No. 258, March 2003.
- Friedrich Schneider and Dominik Enste, “Hiding in the Shadows: The Growth of the Underground Economy,” International Monetary Fund, Economic Issues No. 30, 2002. Available at: http://www.imf.org/external/pubs/ft/issues/issues30/.
- Steven J. Davis and Magnus Henrekson, “Tax Effects on Work Activity, Industry Mix and Shadow Economy Size: Evidence from Rich-Country Comparisons,” National Bureau for Economic Research, Working Paper No. 10509, May 2004.
- Jan Ihrig and Karina S. Moe, “Lurking in the Shadows: The Informal Sector and Government Policy,” Board of Governors of the Federal Reserve System, June 2001, p. 12.
- Scott Moody, “The Cost of Tax Compliance,” Tax Foundation, February 2002.
- L. Nye Stevens, “Paperwork Reduction Act Implementation at the IRS,” U.S. General Accounting Office, GAO/GGD-99-4, November 1998.
- Tax Policy for Economic Growth,” Joint Economic Committee of Congress, Staff Report, November 2001, p. 7.
- See Edgar K. Browning, “On the Marginal Welfare Cost of Taxation,” American Economic Review, March 1987; Charles J. Ballard, John Shoven and J. Walley, “General Equilibrium Computations of the Marginal Welfare Costs of Taxation in the United States,” American Economic Review, March 1985; and Charles Stuart, “Welfare Costs per Dollar of Additional Tax Revenue in the United States,” American Economic Review, June 1984. Cited in Richard K. Vedder and Lowell E. Gallaway, “Tax Reduction and Economic Welfare,” Joint Economic Committee of Congress, Study, April 1999.
- Martin Feldstein, “Tax Avoidance and the Deadweight Loss of the Income Tax,” National Bureau of Economic Research, Working Paper No. 5055, March 1995, and “How Big Should Government Be?” Working Paper No. 5868, December 1996.
- “Tax Policy for Economic Growth,” Joint Economic Committee of Congress, Staff Report, November 2001, p. 8.
- Alvin Rabushka, “The Flat Tax in Russia and the New Europe,” National Center for Policy Analysis, Brief Analysis No. 452, September 3, 2003.
- Alvin Rabushka, “Flat and Happy,” Wall Street Journal, January 12, 2005.
- Laurence Kotlikoff, Hans Fehr and Sabine Jokisch, “Aging, the World Economy and the Coming Generational Storm,” National Center for Policy Analysis, Policy Report No. 273, January 2005.
- For a detailed description of the model, see Hans Fehr, Sabine Jokisch and Larry Kotlikoff, “The Developed World’s Demographic Transition – The Roles of Capital Flows, Immigration, and Policy,” October 2003. Available at http://www.ncpa.org/pub/pdf/demotransfinal.pdf.
- Author’s calculations, based on 2000 data in Table 646, Statistical Abstract of the United States: 2001, U.S. Census Bureau.
- Specifically, the rate is set at 11.2 percent in 2005, rising to 13.3 percent by 2030, due to the costs of an aging population.
- Robert E. Hall and Alvin Rabushka, The Flat Tax, second edition (Stanford, Calif.: Hoover Institution Press, 1995).
- Bruce Bartlett, “The Armey Flat Tax,” National Center for Policy Analysis, Brief Analysis No. 136, October 18, 1994.
- This effectively transforms it into a VAT with a rebate, which we consider below.
- Estimates of eligibility for public health care programs vary. The lower estimates are that around 10 million Americans are eligible but unenrolled, while the upper range of estimates is closer to 14 million. One study found that just over half (51.4 percent) of eligible, nonelderly adults were enrolled in Medicaid in 1997. Of the remaining adults who were Medicaid eligible, 21.6 percent had private coverage while 27 percent were uninsured. Another study found that about seven million uninsured children eligible for either SCHIP or Medicaid are not enrolled. See Amy Davidoff, Bowen Garrett and Alshadye Yemane, “Medicaid-Eligible Adults Who Are Not Enrolled: Who Are They and Do They Get the Care They Need?” Urban Institute, Series A, No. A-48, October 2001. Of those children eligible for Medicaid or SCHIP, one-third are eligible for SCHIP while two-thirds are eligible for Medicaid. Eight percent of uninsured, low-income children are illegal aliens and, as such, not eligible for either Medicaid or SCHIP. See Lisa Dubay, Jennifer Haley and Genevieve Kenney, “Children’s Eligibility for Medicaid and SCHIP: A View from 2000,” Urban Institute, Series B, No. B-41, March 2002. Also see “The Uninsured in America,” Blue Cross Blue Shield Association, February 27, 2003.
- Peter J. Cunningham, et al., “Who Declines Employer-Sponsored Health Insurance and Is Uninsured?” Center for Studying Health System Change, Issue Brief No. 22, October 1999.
- See John C. Goodman, “Characteristics of an Ideal Health Care System,” National Center for Policy Analysis, Policy Report No. 242, April 2001.
- Michael W. Sherraden, Assets and the Poor: A New American Welfare Policy (Armonk, N.Y.: M.E. Sharpe, 1991).
- Hall and Rabushka, The Flat Tax.
- The flat tax advocated by Hall and Rabushka, is a variant on a VAT with a rebate. Under the flat tax, businesses are allowed to deduct their wage payments, but households have to pay taxes on the receipt of their wage income. Thus, households, not business, mail the government the tax payments on the value-added associated with the supply of labor.
- June O’Neill (director), “The Economic Effects of Comprehensive Tax Reform,” Congressional Budget Office, July 1997.
- “Surveillence of Tax Policies,” Organization for Economic Cooperation and Development, Economics Working Paper No. 29, 2001.
- Andrew J. Rettenmaier and Thomas R. Saving, “Social Security Reform Without Illusion: The Five Percent Solution,” National Center for Policy Analysis, Policy Report No. 272, December 2004.
- Does not include contributions to personal retirement accounts.