Tax expert Edward J. McCaffery, holder of the Maurice Jones Jr. Professorship in Law at the USC Law School: "The current system is too messy and onerous. And because it is wage-based, it hits the middle class the hardest, and the very rich can avoid it almost altogether."

Issue Date: 4/15/2002

To all Americans who hunker down with reams of paper this month in the annual hair-pulling ritual known as filing federal income taxes, Edward J. McCaffery would offer a bonfire instead.

"The current system is too messy and onerous," says McCaffery, holder of the Maurice Jones Jr. Professorship in Law at the USC Law School. "And because it is wage-based, it hits the middle class the hardest, and the very rich can avoid it almost altogether. In a word, it’s unfair."

Both George W. Bush and Bill Clinton have done their parts to complicate an already complex system, McCaffery said. And the most recent law isn’t much better.

"The younger George Bush’s Economic Growth and Tax Relief Reconciliation Act has so many phase-outs and phase-ins," he said, "that it makes Enron’s off-the-books shenanigans look simple."

"We can repeal the death tax for the simple reason that dead men don’t spend. Tax the heirs when they spend." – Edward J. Mccaffery

McCaffery’S solution? Stop tinkering. Scrap the whole system, and tax spending rather than work or savings.

McCaffery, co-director of the USC-Caltech Center for the Study of Law and Politics, puts forth this argument in his second book, "Fair Not Flat: How to Make the Tax System Better and Simpler," just out from the University of Chicago Press.

The "Fair Not Flat" plan rests on the basic accounting idea that people either spend or save everything they have, McCaffery explained.

If income equals consumption (spending) plus savings, he said, then subtract savings from income, tax the remainder and you have a national consumption tax.

McCaffery builds progressivity into his plan. He illustrates with a hypothetical family of four: The first $20,000 they spend would be tax free. The next $60,000 would be taxed at 10 percent. Above that, the rates would go up progressively so that families spending more than $1 million annually would be taxed at a rate of 50 percent.

This is tantamount to a national progressive sales tax, McCaffery said, and is similar in its basic premise to the "USA Tax" plan proposed about seven years ago by Sen. Pete Domenici and then-Sen. Sam Nunn.

But unlike USA Tax, McCaffery’s plan would also adopt an actual 10 percent sales tax – in addition to the annual consumption tax – and use it in lieu of the lowest (10 percent) bracket.

What results is the most appealing part of the plan, McCaffery said: Only those families spending over $80,000 a year – or 5 percent to 10 percent of families – would have to file and pay at all.

To replace the "zero bracket," McCaffery suggests mailing those people a rebate check for $2,000 (or 10 percent of $20,000).

In the spirit of consistency, McCaffery would also eliminate the much-debated estate tax.

"We can repeal the death tax for the simple reason that dead men don’t spend," McCaffery said. "Tax the heirs when they spend."

Asked if it’s dangerous to tax consumption, McCaffery said: "Consumption is good; it’s the engine of our economy. But taxing consumption won’t slow it down. Under my plan, tax rates won’t increase for any but the wealthiest spenders. For many lower- and middle-class Americans, taxes would actually decrease. And with that money, a vast majority of Americans would be able to spend more if they wanted to."

Government coffers should not be affected. "The plan is roughly revenue-neutral," McCaffery said.

Just as his plan wouldn’t undermine the economy, McCaffery said, it wouldn’t instigate class warfare either: "I’m not proposing that we simply tax the wealthiest people in our country – just those who spend the most. I think that’s fair, and I think it’s in line with classic American values."

The plan is bipartisan, McCaffery adds, because it appeals to and disturbs both sides of the political divide. (He’s garnered endorsements from politicians as diverse as Pat Schroeder, Bob Packwood and Bill Bradley.) But he wrote his book primarily for "regular Americans, who clearly hunger for reform but don’t want to go with the extremes of a flat tax, which would raise rates on the middle class to pay for tax reduction for the rich."

McCaffery characterizes his book as a "public intellectual project. Once we’ve cleared up all the clutter," he said, "we can see what we’re doing then. We can decide later, for instance, whether spending on education or health is taxable consumption or not.

"These kinds of complex philosophical and moral questions that attend the specifics," he said, "I leave to a national debate."

Volume #21
Issue #26