Professor Michael Graetz Makes the Case for a Value-Added Tax

Columbia Law School Tax Expert Says His Plan Eliminates Tax Returns for 150 Million Americans


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New York, June 2, 2010 The tax system is a mess, says Michael Graetz. And he’s eager to clean it up.
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Graetz, the Isidor and Seville Sulzbacher Professor of Law, has garnered widespread attention for his plan to impose a value-added tax (VAT), which would effectively act as a national sales tax. He says a VAT would make the nation less reliant on income-tax collections and allow the government to shed the yoke of tax breaks and credits to special interests.
In his latest book, 100 Million Unnecessary Returns, now out in paperback with a new introduction, Graetz outlines how a VAT at a rate of 10 to 15 percent could finance an income-tax exemption of $100,000 of family income and substantially lower rates above that amount. That would eliminate 100 million families—or about 90 percent of filers from income tax rolls.
“These people would have no further dealings with the IRS,” Graetz says.
“For them, April 15 would be just another day.”
Graetz maintains the result would be a tax system that would be fairer, less complex, and can stimulate employment. “And it would put the U.S. tax system on a much-sounder footing going forward to produce the kinds of revenues that we’re going to need as we look ahead.”
As Graetz envisions the VAT, it would be tacked onto the cost of virtually all goods and services. There would be exceptions for such items as education, religion, and most health care.
Some 150 nations have a version of a VAT. Indeed, the U.S. is the only nation in the Organization for Economic Cooperation and Development without one. With a $1.4 trillion budget deficit and a $12 trillion national debt, the VAT is now being looked at by some policymakers in Washington as a way to reduce red ink and stimulate growth.
Paul Volcker, a former Federal Reserve chairman and adviser to President Obama, praised Graetz’s plan as a “sensible plan for reform.” Economist Alan Blinder, a former member of President Clinton’s Council of Economic Advisers, said “When the nation finally gets serious about reforming the tax code, this important book will be one of the reasons.” 
As outlined in 100 Million Unnecessary Returns, Graetz’s tax plan would also:
  • Cut the corporate income-tax rate to 15-20 percent, which Graetz says would be among the lowest in the world, encourage more domestic and foreign investment in the U.S., and increase employment. To help accomplish this, Graetz would curtail the myriad of corporate tax shelters that help profits more than the economy.
  • Replace the earned-income tax credit, and provide low- and middle-income families with payroll tax reductions and debit cards to offer relief from the VAT burden.
  • Retain the estate tax with higher exemption levels. Another possibility, Graetz says, is to create a federal inheritance tax, which would tax recipients, rather than the transferors of wealth.
At a time when the budget deficit and national debt are growing at unsustainable levels, Graetz contends, the U.S. needs a system that is not so heavily reliant on the income tax to pay its bills. “In our current system, presidents and other politicians use the income tax system the way my mother used chicken soup: as a magic elixir to solve all difficulties,” he writes.
The problem: as baby boomers age, the workforce shrinks and with it, income tax collections. Couple that with the thousands of tax breaks won by special interests at the same time more of the population relies on Medicare and collects Social Security, and Graetz says you wind up with the fiscal equivalent of a train wreck.
Instead, he argues, a VAT provides a consistent and reliable source of revenue, and one that is easy for taxpayers to understand and harder to evade, as the VAT would be collected entirely by businesses. Currently, Graetz says, taxpayers and the government spend $150 billion to calculate taxes and administer the system. Even worse, the IRS estimates taxes are underpaid by $300 billion annually.
“The time for tinkering at the edges has passed. We owe it to ourselves and to future generations to put our house in order.”
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