Annual Baker Conference Focuses on Major Tax Reform Proposals

Annual Baker Conference Focuses on Major Tax Reform Proposals

BY DANA DURBIN
Rice News Staff
Nov. 12, 1998

Two things are still certain after last week’s fourth annual conference at the James A. Baker III Institute for Public Policy: death and taxes.

Another certainty was made clear at the conference “Tax Reform for the Millennium”–the U.S. tax system is broken and something must be done to fix it.

U.S. Rep. Bill Archer, R-Houston, a proponent of a consumption-based tax system to replace the current income tax, was the keynote speaker on the first day of the conference, held Nov. 5-6 at James A. Baker III Hall on the Rice campus.

Archer, chairman of the House Ways and Means Committee, spoke of a meeting he attended where he discussed the merits of a consumption tax. One man in the audience told Archer he didn’t think much of the idea. When Archer asked why, the man told him, “Because I’ll still have to pay taxes.”

Americans can always count on paying taxes, Archer said, but he and many others feel that the government should implement a system that is fairer and simpler.

“The harder and longer you work, the more you pay,” Archer said. “It should be that the more you spend, the more you pay. That’s fair and that’s right.”

Joining Archer at the conference were academicians and other government officials. They essentially discussed the pros and cons of the various proposals designed to reform the tax system, an issue that Baker Institute Director Edward Djerejian called “one of the most pressing public policy issues of the day.”

The conference focused on the major tax reform proposals under consideration today: the national retail sales tax (NRST), the flat tax and the value-added tax–all consumption-based rather than income-based.

Some conference participants, including Leonard Burman, deputy assistant secretary for tax policy at the U.S. Treasury Department, offered forth the idea that a better solution to the current complicated tax system would be to undergo a major overhaul rather than to replace it altogether.

In his speech, Archer said a consumption-based tax would help the U.S. economy by enhancing our ability to compete overseas.

It would also mean “zero tax on savings,” would help eliminate the underground economy of citizens who don’t pay taxes, and would “get the IRS completely and totally out of the lives of every individual,” Archer said.

But the consumption-tax system is not without its drawbacks.

Rice President Malcolm Gillis, who served as moderator of a panel discussion and presented a paper, discussed the major drawbacks to consumption tax proposals.

The flat-tax–similar to the income tax in its basic structure, but it taxes wages at a flat rate for all individuals–has been oversold, especially with regard to inflated claims of simplicity and ease of administration, Gillis said.

As for the national retail sales tax, Gillis said it would require a high tax rate–possibly as high as 30 to 35 percent–to match the revenue it is designed to replace.

James A. Baker, III, former secretary of state and secretary of the treasury, knows firsthand how hard it may be to implement reform. He was a major player in the Tax Reform Act of 1986, which lowered top tax rates, streamlined the bracket structure, closed loopholes and removed millions of less affluent Americans from the tax rolls.

Unfortunately, Baker said that much of what was achieved in 1986 has since been lost. There is a growing sense, he said, that the current system is beyond repair.

Baker brought up a major stumbling block to a consumption-based tax that was echoed by others who participated in the conference–the regressivity of such a system that reduces the taxes for the most wealthy while increasing the burden of others.

If tax reform is to succeed, it will require presidential leadership and bipartisan support, Baker said. And, firmness of principal must go hand-in-hand with clarity of purpose–to produce a better tax system.