Tax Reform Schools

If you think tax simplification is difficult in D.C., just try Albany, Annapolis, Atlanta, Austin...

John Hood from the November 1998 issue

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The argument for tax-exempt educational savings accounts is a bit different. Education isn't just an alternative way to consume one's income. Often, it is an investment in skills and credentials that will yield a future return in higher (and taxable) wages. Just as the purchase of machinery or equipment should be tax-deductible, because it generates future taxable income, so should some training and education expenses paid by employers or employees. An educational savings account into which you can deposit several thousand dollars a year tax-free, and from which you can withdraw unlimited amounts tax-free, is defensible on tax policy grounds (as well as being an attractive means of enabling families to exercise school choice without the regulatory problems that vouchers might bring).

Other possible reforms include making payroll taxes deductible from income taxes (a must if Social Security privatization becomes feasible) and expanding the lower income tax brackets so more taxpayers pay the same rate (thus reducing the revenue loss from a subsequent elimination of the higher rates). The key is to pick ideas that generate strong political constituencies of their own while avoiding the mistake of raising taxes on other powerful constituencies.

Tax cutters fall along a continuum, from pure flat taxers and national sales taxers to corporate types who lobby for special rates, credits, and exemptions. Successful tax reformers will chart a middle course between these two poles, finding ways to promote ambitious ends through targeted means. As Bush discovered, how tax reform will be greeted by lobbies and perceived by voters is just as important as its theoretical underpinnings.