The Purple Tax Plan

Dear Fellow Economists and Other Concerned Citizens,

As you know, our tax system is in dire need of reform. It's inefficient, inequitable, and complex. It also discourages work and saving. Thanks to a myriad of tax loopholes, the system generates remarkably little revenue and is much less progressive than is commonly believed. Indeed, our panoply of tax and transfer programs leaves many of the poor facing higher effective marginal and average tax rates than many of the rich.

Given our nation's enormous fiscal and economic challenges, we can no longer afford a dysfunctional tax system. Most politicians, whether from red or blue states, agree.

The Purple Tax Plan is a simple, transparent, efficient, and progressive tax system. It will help the economy save, grow, produce jobs, and deliver higher wages.

The Purple Tax Plan replaces the federal personal and corporate income taxes as well as the estate and gift tax with a broad-based, low-rate, progressive consumption tax and a low-rate, progressive inheritance tax. It also makes the highly regressive FICA payroll tax highly progressive and runs the highly progressive Earned Income Tax Credit and Child Tax Credits through the FICA tax. The plan eliminates the need for households and business to file annual income tax returns.

In considering the Purple Tax Plan, please bear in mind that we can have a highly progressive tax system without high marginal tax rates. The Purple Tax Plan features lower marginal tax rates than the current system, yet achieves a much more progressive distribution of tax burdens. It should also generate substantially more revenue. This is due not to "trickle down" or the Purple Tax Plan's very likely strongly positive growth effects, but simply the fact that consumption is a very broad tax base.

We certainly need more revenue. Based on the Congressional Budget Office's long-term forecast of June 22, 2011, our nation's fiscal gap - the difference measured in the present (the present value) of all future projected spending, including servicing the existing debt, and all future taxes is $211 trillion! The fiscal gap represents, in effect, the nation's credit card bill. Unfortunately, we're not even paying interest on this liability, which helps explain its $6 trillion growth over the past year. The Purple Tax Plan would shave roughly $36 trillion off our fiscal gap.

Many people view consumption taxation, imposed as a fixed-rate retail sales tax, as regressive and the taxation of wealth, in addition to wages, at a fixed rate as progressive. Since doing one is mathematically and functionally equivalent to doing the other, both views can't be correct. In fact, both are wrong.

Taxing consumption or, equivalently, the resources used to pay for consumption at a fixed rate is neither progressive nor regressive, but proportional. I.e., if you double economic resources (current wealth plus current and future wages), you double the consumption that those resources will finance, when both quantities are properly measured as present values. Hence, with a fixed consumption tax rate, doubling economic resources will double consumption and double the associated taxes. This is why economist say a consumption tax is proportional.

To make the Purple Tax Plan's consumption tax truly progressive, the plan includes a monthly payment (demogrant), which ensures that those living at or below the poverty line pay no tax, on net, on their consumption.

http://www.businessweek.com/magazine/what-999-means-for-rich-and-poor-10... provides an initial comparison of the progressivity of the Purple Tax Plan with the existing system.

Please read the plan and, if you like it, please endorse it and send the url -- www.thepurpletaxplan.org -- to other economists and concerned citizens.

Sincerely yours,

Laurence J. Kotlikoff

Professor of Economics, Boston University

PS, Please also check out www.thepurplehealthplan.org, www.thepurplesocialsecurityplan.org, www.thepurplefinancialplan.org, www.thepurpleenergyplan.org, www.thepurplegenerationalbalanceplan.org, www.thepurpleeducationplan.org, and www.thepurpleplans.org.