Panel discusses tax reform roadblocks

At the event, William Gale of the Brookings Institution said that the need for deficit reduction was one of the stubborn facts that worked against revenue-neutral tax reform, not to mention the fact that many corporate sectors like the advantages they currently get from the tax code.

“It seems like it’s going to be a big haul, politically, with difficult-to-discern gains,” said Gale, a member of the White House Council of Economic Advisers under President George H.W. Bush. 

The AEI panel convened as officials from both sides of the aisle have expressed a general interest in tax reform, though many in Washington are also skeptical a reform package could be passed this Congress. 

The issue of revenue collection has emerged as something of a potential sticking point, with the administration saying in several different forums that any corporate tax overhaul could not add to the deficit. Some Republicans and business leaders, meanwhile, have said that a tax reform package should be most concerned with helping American companies compete. 

The New York Times also reported recently that many of the deductions and credits that help certain corporations lower their tax bill are quite popular. 

In his Friday remarks, Gale said that broadening the corporate tax base would, by itself, not allow for a deep reduction in the corporate tax rate. 

Some of the panel’s participants, which also included representatives from the Organization for Economic Cooperation and Development, were confident that the United States would take a closer look at something like a VAT in the years to come.

Alan Viard of AEI, a former senior economist at the Federal Reserve Bank of Dallas, declared that economists generally believe that taxes on wages and consumption can be collected most efficiently. 

And while the Senate has voted overwhelmingly against the idea of a VAT in recent years, Viard also noted that the chamber had done a similar thing before adopting recommendations from Alan Greenspan’s Social Security commission in the 1980s.

Viard and other panelists did note that consumption taxes in general were more regressive than other methods of collecting revenue. But Gale cautioned that, with a VAT just one part of many governments’ tax schemes, it might be more important to look at the progressivity of the entire system. 

“I think there’s a lot of scope to address the distributional effects of the VAT, the regressivity of the VAT, within the fiscal framework that actually solves the problem,” Gale said. “And I think taking the VAT off the table, because in isolation it’s regressive, would be a huge mistake.”