Commentary

Cato Tax Scholar Comments on President Bush’s Tax Advisory Panel

October 18, 2005

The President’s Advisory Panel on Tax Reform, headed by former senators Connie Mack and John Breaux, met today for the final time. The panel proposed two tax reform plans. One plan would make changes to the existing income tax. The other plan would scrap most of the income tax and install a consumption-based tax system.

Chris Edwards, Director of Tax Policy at the Cato Institute, had these observations on the Panel’s discussions today:

  • The Panel’s income tax reform plan would make some positive changes such as eliminating the double-taxation of dividends and treating U.S. businesses on a territorial basis with regard to their foreign profits. Both of these changes would increase U.S. business competitiveness and spur investment. However, on both the individual and business parts of this simplified income tax, the proposed top tax rates were still too high. For example, the proposed 32 percent corporate rate would still be higher than the 28 percent average corporate tax rate in Europe.
  • The Panel’s consumption-based tax plan resembles the Steve Forbes flat tax in its basic structure, except that it has multiple rates on individuals rather than a single rate. The business part of this plan is a “cash-flow” tax, which would be vastly simpler than the current corporate income tax. The cash-flow tax plan would be territorial, and would replace today’s complex depreciation system with simple “expensing,” or immediate write-off, of investments. As some of the panelists noted, expensing would spur rising investment in factories and machines, increase worker productivity, and raise wages. This plan would represent a huge leap over the current income tax in terms of simplicity and economic efficiency.
  • The Panel rejected a plan that included a value-added tax (VAT), which is a good thing because VATs fuel government growth, as they have in Europe.

For a detailed discussion of business cash-flow taxes, like the one proposed by the Panel, see Chris Edwards, “Replacing the Scandal-Plagued Corporate Income Tax with a Cash-Flow Tax

See also Chris Edwards, “Options for Tax Reform

For further information, contact Chris Edwards, Director of Tax Policy, Cato Institute, 202-789-5252.