Taxing Ourselves: A Citizen's Guide to the Great Debate over Tax Reform.

Physiocrats and Physicians.

The Physiocrats knew that the rate of economic development depended on the size of the agricultural surplus - without some surplus, there was no hope for the creation of a manufacturing sector. Eighteenth-century French agriculture was hamstrung by an incredibly complex and inefficient tax system. The Physiocrats argued that implementing major tax reform was the key to economic progress. Flip the calendar forward 250 years and we see the United States and many other countries wrestling with complex and inefficient tax systems. The key issue, so well posed by the authors of this book, is this: Is major tax reform required, or can the existing tax system be repaired? In particular, should the income tax be replaced by a consumption tax or can the income tax be patched to do the job? Plus ca change, plus c'est la meme chose.

Slemrod and Bakija lead us quickly through an overview of the U.S. tax system and a succinct description of what economics has to say about the qualities of a good tax system - fairness, efficiency, simplicity, and enforceability. The authors then turn to an analysis of various proposals for replacing the income tax with some form of consumption taxation and then to a discussion of ways to make the income tax function more effectively. The book concludes with a survival kit to help the citizen cut through the propaganda that obscures the key issues in tax-reform debate.

The authors are extraordinarily careful to say what the book is and is not about. It is not about government expenditures; it is not about all components of the revenue structure; it is not yet another tax reform proposal; it is about the personal and corporate income tax systems. Should they be replaced or repaired? Given its focus, the book is comprehensive. All bases are covered. Many extreme opinions on the effects of this or that proposed reform are shredded, and the reader is treated to a sensible summary of what economics has to say. No doubt many readers will find some things with which they disagree; some will find much with which to disagree, but I think the book goes a long way to re-establishing the credibility of economics in an area where extravagant claims have badly damaged its reputation.

Let me raise some issues where I found myself questioning the positions taken in this book. As the authors observe, the incidence of a tax is critical for determining fairness. Tax burden tables are often used to summarize what is known about the incidence of taxes but the concept - the incidence of any broad-based tax - is not well defined. The effects of an increase in the corporate income tax on the distribution of income, for example, depend on what is done with the tax revenue; thus, the concept - the incidence of the corporate income tax - is unsound. I suspect that over long time periods, economic forces have more to do with the determination of after-tax rather than pre-tax incomes, so tax changes could cause changes in the inequality of pre-tax incomes (cf. p. 58).

Many have argued that in a life-cycle setting, interest taxation is inefficient. It turns out, however, that with a labor-leisure choice, this is no longer true. In fact, under the assumptions of some of the popular general equilibrium models, the addition of an interest tax to a pure consumption tax regime is welfare-improving.

The authors appear to dismiss the trade and public finance literature on models of competing regions (cf. pp. 118-119). While this literature has not developed as strong an empirical base as it should have, international competition does limit the ability of one country to set tax rates that are very different from those in the rest of the world. And the formation of trading blocs may have a large impact on a member country's tax structure. As one contemplates the future, the consequences of international competition are likely to become more important.

The authors seem to buy into the idea in the literature that tax-deferred savings plans, such as IRAs and 401(k)s, help move an income tax system towards a consumption tax. I think these programs actually have the opposite effect because income tax rates in the presence of savings plans have to be higher to raise the same revenue. Thus the distortion of each individual's consumption plan is even greater than it would be without them. Savings plans are welfare reducing, not welfare increasing.

But these are footnotes to the main story. The authors favor a repair of the income tax system together with the possible introduction of a national consumption-based value-added tax. The case for expenditure taxation is quite compelling on grounds of fairness. It is difficult to tax everyone's income under the income tax, so an expenditure tax does guarantee that income tax avoiders or evaders pay something. Based on Canada's experience with the Goods and Services Tax, I would recommend: (i) tax all goods and services; (ii) keep the tax rate low; and (iii) force retailers to display tax-inclusive prices.

Physicians routinely prescribe treatises on taxation for insomnia. They had better make sure their malpractice insurance is paid up before prescribing this book.

John Burbidge McMaster University