A Plan to Junk the Income Tax

Q&A with Yale law Prof. Michael Graetz on how to create a simpler tax system.


People criticize the VAT for being a hidden tax, so it is easy for politicians to increase. Would a VAT inevitably lead to higher taxes?

My proposal responds to that argument by using the VAT to lower income taxes. If you have a $100,000 exemption, no congressman is going to say, "Let's lower that exemption to get those people back in the income tax." There's some mythology about the ever increasing VAT. Canada has reduced theirs since it was enacted.

Many politicians suggest that what we need to solve revenue problems is to just raise taxes on high-income people.

I don't think we have a need for more revenue in the short term. In fact, we may need lower taxes in the short run if we're in a recession. But because of the aging population and the rise in healthcare costs in coming decades, we're going to have a fiscal problem that will require the government to take a hard look at what it is spending and cut spending in some instances, and we will need to look how to cut spending and will also require higher revenues. The plan puts in place a system where you might be able to get those revenues without courting economic disaster. The current system does not have much room in it for higher revenue. You can't raise corporate tax rates in the current international economy without harming businesses and workers. The increases in tax rates at the top will produce some revenue, but they don't produce the kinds of revenue that deal with these problems.

In 2040 or 2050, if nothing changes, we're going to have a tax system that can barely fund Social Security, Medicare, and Medicaid alone. Something has got to give. We ought to restructure the tax system now to try and get a more competitive economy and more economic growth.