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Looking for Leadership in Tax Reform

February 1, 2013 3 minute Read by John Prestbo
Many people agree that high on the to-do list for putting our economic house in order — onto a sound footing for accelerated growth — is to reform our bloated, byzantine tax code. Plans for doing so are a dime a dozen, though you won’t find many details being examined in the presidential and Congressional races. One from a University of Chicago professor caught my eye, because it’s simple. Richard H. Thaler, professor of economics and behavioral science, called it the “28 plan” in an article in the Sunday New York Times business section. He sums it up this way: “All income above $1 million a year for a household will be taxed at 28 percent. There are no deductions, and all income, including capital gains and dividends, is included.” He extends the 28% rate to corporate taxes and estates larger than $3.5 million. Thaler says deductions, such as for home-mortgage interest and charitable contributions, might be scaled back starting at household incomes of $250,000 annually until they are totally gone at $1 million. People with lower incomes would keep their deductions. Tax rates for everybody else, including rich people’s first $1 million, would be the three brackets offered by the Bowles-Simpson commission. What is commendable from this plan? First, the straightforward, consistent rate of 28% eliminates the income-shifting games that the rich currently play. Second, taxes become somewhat more progressive, especially in the $250,000-to-$1 million range. Third, it ducks the political backlash that likely would come from eliminating the well-liked deductions for the middle class. I have no idea whether this plan would generate enough income to run the government. If not, there are some non-income taxes — Thaler suggests the gasoline tax — that could be raised. Regardless, this is the kind of thinking that could engage voters and give them a stake in helping make decisions regarding our economic future. But we hear little to none of it from our political representatives, who apparently want to keep all the options firmly in their hands for power-brokering later on. Leadership, anyone?

Author

John Prestbo
John Prestbo

2012 Economic Growth Fellow

John Prestbo is retired as editor and executive director of Dow Jones Indexes. Previously he was markets editor at The Wall Street Journal. He has co-authored or edited several books over the past 30 years. The most recent is “The Market’s Measure: An Illustrated History of America Told Through the Dow Jones Industrial Average,” published in 1999 by Dow Jones Indexes. His column, Indexed Investor, appears on the highly regarded “MarketWatch” business and finance website. He received his bachelor's and master's degrees from Northwestern University.

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