THE VIRGINIAN-PILOT
Copyright (c) 1995, Landmark Communications, Inc.
DATE: Tuesday, May 2, 1995 TAG: 9505020007
SECTION: FRONT PAGE: A12 EDITION: FINAL
TYPE: Editorial
LENGTH: Medium: 62 lines
The latest entry in The Great Tax Reform Sweepstakes of 1995 is the most interesting proposal yet. It comes from Sens. Sam Nunn, D-Ga., and Pete Domenici, R-N.M. They call it the USA Tax.
Unlike more radical proposals to reform the tax system, the USA Tax is neither a back-of-a-postcard flat tax nor a national sales tax. It is, instead, a reform of the existing progressive income tax.
That's apparently what the public is after. A new Wall Street Journal/NBC News poll found that 51 percent of those polled would welcome a complete overhaul of the tax system, but 60 percent favor graduated rates over a flat tax.
The USA Tax is designed to reward saving and investment and to penalize consumption. Tax brackets would be maintained and each income group in society would pay about the same proportion of total taxes as they do now. So, unlike flat taxes, the burden wouldn't be shifted to those earning less.
The USA Tax would also raise as much as the current system, unlike Majority Leader Dick Armey's flat-tax plan which appears to fall $186 billion short.
Still, the USA Tax would make big changes. On the corporate side, a flat tax of 11 percent would be implemented. For individuals, deductions for mortgage interest, charitable contributions and alimony would still be allowed but all others would be eliminated.
In their place, a new deduction would be created for savings. Each year, any income that was saved or invested would be exempt from taxation. If dividends or capital gains were reinvested, they too would escape taxation.
Under this plan, two families with identical income could pay very different tax bills depending on what they did with their money. The family that invested would pay less tax. The family that spent all it earned would pay more in tax.
Clearly, the USA Tax would help address the nagging problem of America's savings rate, one of the lowest of any industrialized country. That could be very good for private enterprise, but at least two concerns must be addressed.
The USA Tax needs to avoid imposing any new burden on low-income taxpayers. They generally must consume all they earn which would deny them the benefit of the savings deduction. Nunn and Domenici claim low income taxpayers will benefit from a slightly increased standard deduction and a more generous earned-income-tax credit for the working poor. Some real-life examples will be needed to test their claims.
It will be harder to test what effect such a change would have on the overall economy, but it's worth worrying about. This society is built on consumption. Consumerism has been the great engine driving our productivity. If the USA Tax were really to produce a nation of penny-pinchers - dedicated to frugality and reluctant to spend on consumer goods - what effect would that have on enterprise and the economy?
Nunn and Domenici highlight the advantages of greater savings. Are there offsetting disadvantages to a reduced willingness to spend? Before rushing in to such a change, it's worth investigating. That said, tax reform is surely needed and this proposal has merits. It deserves serious consideration. by CNB