Jerry Brown’s Tax Reform Ideas Aren’t Perfect, but They’re Promising

As the Democratic primary campaigns lurch toward a done deal, Edmund G. (Jerry) Brown Jr.’s short-lived campaign momentum appears to have waned. But controversy continues to swirl around his dramatic proposals for tax reform. And while Brown’s candidacy may be disappearing into the sunset, the tax reform issues he raises are here to stay. So it may be worth a pause to consider the substance of Brown’s tax proposals.

The former California governor’s proposals are intentionally simple and therefore easy to summarize. He proposes a single comprehensive federal tax, unifying the personal income tax and the payroll tax, with a single “flat” tax rate of 13%, which would function like a national sales tax levied on producers rather than retailers. Almost all personal income and corporate tax deductions would be eliminated.

Brown’s primary motivation in presenting such radical tax reform suggestions flows from his sharp political critique of the political power structure. Given the influence of the wealthy over the political process, he argues, a complex tax system with many parts and many provisions is bound to encourage lobbying and favor the rich--creating what he calls “the banquet feast of corruption.” The medium of the tax legislative process becomes the message of privilege, forming the “backdrop for all the deals.”

In response, Brown’s proposals have received harsh and lavish criticism. The New York Times editorialized that until Brown fixes his proposal, “Bill Clinton is right to attack the plan as a budget-buster and a dagger aimed at poor families.” The director of Citizens for Tax Justice, a progressive tax research institute, charged that Brown’s tax plan “would be the greatest boon for the rich and powerful since Andrew Mellon was Calvin Coolidge’s secretary of the Treasury in the 1920s.”

There are three crucial issues raised by Brown’s tax proposals: its simplicity, its rate structure and its reliance on two separate tax systems. In order to evaluate the promise of his specific proposals or something like them, we need to look at each of these questions in turn.

Brown is absolutely correct, in my view, in pushing for an integration and simplification of the tax system. The structure now invites lobbying and, through solicitation of tax favors for powerful vested interests, corruption. Many now agree that we should move toward a dramatically simplified system that would roll most, if not all, of the federal taxes into one structure and make that system as simple as possible--simple rates, few loopholes, minimum opportunities for pigs feeding at the trough. In this respect, Brown’s proposals sensibly and helpfully point in the right direction.

That brings us to the second principal issue, the question of rate structures. Brown’s tax proposals feature essentially “flat” rates, with all households paying basically the same rate in the personal income tax and all firms paying the same rate under a value-added tax.

The net result would probably be regressive, with more affluent families paying a lower percentage of their income in taxes than poorer families. It is true that all households would be likely to pay roughly the same percentage of their income in personal taxes. But the value-added tax, like a sales tax, would presumably be passed on to consumers in higher prices. As a result, relatively poorer families would pay a higher percentage of their income under the value-added tax than more affluent families, since poorer families spend more of their income on consumption, the expenditure category that would be impacted directly by the tax.

But this regressive character is not an essential or necessary feature of such simple or integrated tax systems. As the New York Times commented on Brown’s proposal, the “important term is not flat but integrated.” Integrated tax systems can be relatively progressive through adjustments that would not compromise their simplicity and, therefore, their integrity. One could exempt, say, the first $10,000 of family income from the “flat” personal tax. And one could exempt food products from the value-added tax.

Brown has acknowledged in recent interviews that his proposals should be made more progressive, that he did not intend them to hit hardest on relatively poorer families. While he can properly be criticized for carelessness in rushing his initial proposals into the campaign, such simplified tax systems can be substantially progressive while retaining their single-rate structure.

The third issue involves the question of the value-added tax. Should we stick to the current array of taxes mobilized by the federal government, however simplified and integrated? Or should we begin moving over to the sort of value-added tax predominant in most European countries?

Here, we usually encounter three different arguments.

First, VATs can potentially be regressive. But, as we have already seen, this feature can be substantially offset by exempting broad categories of necessary products on which less affluent households tend to concentrate their expenditures.

Second, many economists argue that we should move toward some kind of national sales (or expenditure) tax in order to encourage personal saving. (If consumption were taxed but not the rest of income, it would presumably provide an incentive for households not to spend and therefore to save.) I don’t regard this as a crucial concern. Investment has stagnated in the United States because of reasons other than a lack of savings. There are other policies that would more effectively promote vibrant investment than using the tax system to encourage saving.

Third, some economists have argued that the visibility and transparency of our current taxes--levied directly on income and property--create a built-in resistance to government spending. One of the reasons European governments can afford to play a more active and vital role in fostering economic development, indeed, may be that taxes levied under a value-added tax system are less obtrusive and provoke less direct resistance to the government’s laying claim to a substantial revenue base. Here, while vast majorities of Americans would like to see a broader government role in areas such as education and health care, the public is simultaneously presumed to stand firmly against higher taxes. A value-added tax might begin to help resolve this seeming contradiction.

This argument seems to me to have some plausibility. While it may seem like a devious kind of justification for a value-added tax, we desperately need to expand the government’s role in the United States. Shifting to a less transparent method of assessing and collecting taxes may be one necessary way of reducing resistance to such efforts.

On balance, then, there is much of value in Brown’s tax proposals. He deserves to be criticized for the regressivity apparent in his original hasty proposals. But he should be applauded for having put forward some promising proposals in a way that both addresses real problems and commands real attention.