Tax What We Spend, Not What We Save

JOHN C. DANFORTH and DAVID L. BOREN

April 20, 1993|By JOHN C. DANFORTH and DAVID L. BOREN

Washington. -- The budget deficit has consumed most of the public's attention to the economy. But there is a second problem whose solution is necessary to building our economic strength: We must change our tax system to one that encourages saving, investment and economic growth.

As long as Congress and the administration are content to make only minor and cosmetic alterations in a fundamentally unproductive and short-sighted tax system, Americans will continue to spend lifetimes catching up instead of getting ahead. The time for tinkering is over. It is time to create a tax system that works for Americans instead of against them.

There is nearly universal agreement among economists and policy makers that we save too little while we borrow and spend too much. But why are we surprised at the unwillingness of Americans to save and invest? The tax code punishes them for doing so.

The average savings rate in the U.S. in the last decade was less than half the rate of the three preceding decades. Our national savings rate is less than 5 percent; Japan's is 20 percent.

Why would any taxpayer work hard to save money in order to be taxed not once, but twice? First, we tax wages, and then we tax the interest and dividends produced by wages that are saved and invested. We impose one of the highest tax rates in the developed world on gains in the value of assets, further stacking the deck in favor of consumption and against investment.

From a tax standpoint, it makes sense to spend more than you earn. The tax system tells you to take out a home-equity loan and take a tax deduction on the interest payments. Taxpayers who work, save and invest have a heavier tax burden than those who live beyond their means. Saving doesn't pay under our tax laws; spending does.

A similar deterrent to investment exists at the corporate level. With our current depreciation rules, returns on capital investment in the United States are meager and a long time coming. An American company under the alternative minimum tax system recovers about 34 percent of an investment over five years through depreciation allowances and other tax provisions.

In those same five years, a business in Japan recoups nearly double that amount, about 64 percent, while in Germany, the figure rises to more than 87 percent and in Korea, about 100 percent. With the exorbitant cost of capital in the United States, the trend of American and foreign companies investing outside our borders is hardly surprising. We cannot continue to write tax policy in a vacuum as though businesses around the globe did not consider the tax consequences of investing in one country as opposed to another.

While our current tax code discourages saving and investment by both individuals and corporations, it could be designed to stimulate growth. A consumption-based tax would chart a new and healthy direction for our national economic policy. It would reward savings, investment and capital formation, pointing the nation toward a future of job creation and economic growth.

With respect to international trade, a consumption tax can be removed from American exports. Every major trading nation has a consumption tax that is refunded on its exports, which puts our workers and businesses at a clear disadvantage. As long as it replaces a corporate tax that cannot be adjusted at the border, the new system we support will reduce taxes on U.S. producers relative to foreign competitors.

Thus, unlike the proposed energy tax, which cannot be removed from exports and would increase all costs of production, a broad-based consumption tax would actually enhance our ability to compete and win in world markets.

A consumption tax can be designed to eliminate any regressive impact on lower-income Americans, without compromising the simplicity of the system. Lower-income taxpayers can receive periodic rebates on such taxes or be taken off the tax rolls entirely by raising the standard deduction. Working Americans can be given relief through cuts in regressive payroll taxes.

In the next few months, the country must make significant decisions that impact our tax code. The American people will support proposals that will result in a stronger, more competitive nation in the long run.

We cannot fully provide for full economic growth if we raise revenue through an incurably flawed income tax system. We will live up to the challenge of these historic times only if we accept all the opportunities presented -- including the chance to transform the tax system into one that encourages competitiveness, economic growth and greater opportunity for all Americans. We should boldly embrace a consumption-based tax system. It's time to seize the moment and make a fresh start.

Sen. John C. Danforth, R-Mo., and Sen. David L. Boren, D. Okla., are members of the Senate Finance Committee.

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