October 18, 2005
Tax Reform -- X tax?
Posted by Victor Fleischer

Dan Shaviro and Paul Caron discuss the press story reporting that the tax reform commission will endorse David Bradford's X-tax or something like it.  The press story describes the proposal as a version of a flat tax; better to call it a progressive consumption tax. 

To echo what Dan says, liberals need to fight through their instincts that any tax system that exempts investment income must be bad.  It's not.  Liberals must recognize that our current system fails to tax a lot of investment income, so don't defend the status quo for the sake of defending the status quo.  More importantly, the X-tax would eliminate some important economic distortions that don't help poor people very much, like the home mortgage interest deduction. 

This could get very interesting politically.  If progressives and smart conservatives can line up together to oppose Miers, they might also be able to get together (e.g. Shaviro & Bruce Bartlett) to support the X-tax. 

But I'm afraid that too many homeowners are addicted to high real estate prices for the proposal to get too far politically (eliminating the real estate subsidy could pop the housing bubble).  The challenge, then, is to convince people that some short-term pain is worth it for an economy that runs more smoothly in the long run. 

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Comments (1)

1. Posted by Pubulis on October 1, 2006 @ 1:09 | Permalink

The X-tax is simply an economist's mental masturbation and a cheap parlor trick. While you highlight only the mortgage deduction becoming irrelevant under the system, all current tax matters become irrelevant. This approach to taxation is uni-purpose – to collect money. And it doesn’t even accomplish that! When thought all the way through, it benefits almost no one, including investors, the government and its own proponents.

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