Viewpoints : New Taxes: Who Should Pay?

N ow that President Bush has abandoned his “no new taxes” pledge, the question confronting lawmakers is: which new taxes?

Free-lance journalist Sharon Bernstein interviewed several prominent economists and business leaders for their views on how to increase taxes.

Murray Weidenbaum

Director of the Center for the Study of American Business at Washington University in St. Louis; adviser to President Reagan.

Conceptually, the best taxes are ones that have the least adverse effect on the work ethic, savings and investment. These tend to be consumption taxes rather than income taxes.

If you raise the marginal tax on income, that reduces the incentive to work longer. On the other hand, if they raise your sales tax it doesn’t affect the amount of after-tax income. If you work harder, you’re still going to make more money. If you work longer you’re going to make more money. If a business takes more risk, it will increase income.

I sure wouldn’t encourage an increase in the corporate profit tax, which is an income tax. We are a high consumption, low savings society, so if we have to increase taxes, let’s tax consumption. Economically, it makes good sense.

John Kenneth Galbraith

Professor of economics, Harvard University; adviser to presidents Johnson and Kennedy.

I wouldn’t object to raising the gasoline tax--it’s too low. And if they want to tax tobacco and whiskey more, that’s all right with me. But overwhelmingly, the revenue should come out of the income tax. And that would mean eliminating the “bubble” that reduces the marginal rate for the highest bracket and putting the tax on ability to pay. I can’t say how much rates should increase--that’s a subject for long discussion and long negotiations.

I would not increase corporate taxes. The corporate tax does not have as clear a relationship to ability to pay, which is the civilized and fundamental test of a good tax. If the government wants a modest increase in corporate taxes, I’m not going to oppose it, but I’m not going to make it as a substitute for the personal income tax.

Michael Reich

Professor of economics, UC Berkeley.

I would support what’s called a “turnover tax” on the stock market of 0.5%. Every time you buy or sell stock, you pay 0.5% of the amount to the government. Other countries have it. You could have it just on short-term turnover, on shares that have been held for less than six months or a year. It would discourage people and institutions from holding shares for such a short time. It would help in allowing companies to have a longer-term time horizon.

I think it would change the relation between ownership and management of companies. It would bring the owners a little closer. If they felt they were long-term owners, they might feel more involved. They might help the company adopt a long-term perspective instead of dropping it as soon as the price went down.

Another tax I’d be in favor of is a tax on legal services. The idea is to create disincentives to use legal services, because I think they’re overused. I would do it above a certain threshold, so it would affect corporations instead of individuals.

In both cases these are progressive taxes. They would mainly be borne by those most able to pay. But they would also have policy effects.

Richard A. Overton

Vice president for tax, Monsanto Co.

If tax increases are imposed, we favor a broad-based, low-rate, invoice-method, value-added tax. This tax is not only neutral between savings and consumption but helps level the playing field between the United States and its major trading partners, as most, if not all, have such a tax.

Any new tax revenue should be used solely for deficit reduction and not new spending programs. Under the free market system, workers keep more of their earnings so that they, not the government, make the decision on how, when and where to invest and spend their money.

Taking into account federal, state and local taxes, government today claims about one-third of the nation’s resources. More importantly, this percentage has steadily increased over the years, with no end in sight. The real question becomes, at what point does the government’s claim on the nation’s wealth become so great as to jeopardize our free market system.

To help focus this debate, we believe it would be helpful if Congress could establish revenue and spending goals so that everybody could have a clear, identifiable and understandable target as to where America’s economic future lies.

David M. Gordon

Professor of economics, New School for Social Research in New York.

I would increase rates in the top personal income bracket to undo some of the damage done in the 1980s. I would push the rates on the top brackets back up to 38%, which is where they were before the last stage of tax reform, and pausing for breath at that point and assessing the need for further tax reform in view of further revenue needs.

I would rather concentrate on personal tax rates rather than corporate tax rates. There is a legitimate argument made about double taxation of income if you tax both corporate and personal income.

I would also seriously consider something like (Sen. Daniel Patrick) Moynihan’s proposal to reduce social security tax rates, since really the two things on the personal tax side that have contributed to such a regressive realignment in the 1980s were both the dramatic slashing of personal income tax rates in top brackets and increasing of social security tax rates.

A value-added tax or a national sales tax would have a regressive impact, and the tax system has been pushed in a regressive direction for long enough.

The strong preference of many economists for sales taxes is based on the idea that the way to revitalize the economy and revitalize investment is to try to curb consumption expenditures.

I disagree with that logic fundamentally. That mainstream argument is based on a core idea of profit-led growth. It says the way to stimulate growth is to fatten profits and savings. We tried to do that in every way we could during the 1980s and it hasn’t worked. Less affluent families have increased personal borrowing tremendously in order to keep themselves afloat. So a byproduct of efforts to cut wages and cut consumption is that families have gone more into debt.

Lee A. Iacocca

Chairman, Chrysler Corp.

The best way I know to increase revenue is to tap some people who have been getting a free ride in this country for too long--foreign companies who do hundreds of billions of dollars worth of business in this market every year but pay virtually no income tax.

There is a simple way to make them pay their fair share. It’s called a business transfer tax. It is a type of value-added tax that would work like this:

A tax would be imposed on all goods sold in this market. It would be paid by American and foreign producers alike but with a couple of important wrinkles. First, the tax would be rebated on exports by American companies. Second, American companies would be able to offset the tax by deducting it from their U.S. income or payroll taxes.

So, for U.S. companies, it would be a wash. The business transfer tax would substitute dollar for dollar for taxes they now pay. But since foreign producers don’t pay those U.S. taxes, there would be no substitution and all of their payments would represent new revenue flowing into the Treasury.

A 7% business transfer tax would mean a net increase of $42 billion a year for Washington, with no tax increase for individual Americans or American businesses.