Wouldn’t this tax plan solve a lot of problems for Romney?
So basically we would have a simpler system, less vulnerable to crony capitalism, with a top marginal tax rate back to where it was during the Reagan years. And on top of that, the corporate rate under Simpson-Bowles would be 28% vs. 35% today, helping offset the minor-though-regrettable rise in capital gains and dividend rates.
One objection from the right is that this plan would raise taxes. This portion of the S-B plan would raise tax revenues, on a static basis, by $785 billion over a decade due to fewer tax breaks. But given the huge drop in individual and marginal rates — plus the efficiency gains from a less distorted system — I have a hard time believing this would not grow the pie, leaving taxpayers far better off than they would be after a decade of slow growth or Lost Decade.
I mean, this plan actually phases out the employer-provided health tax exclusion, the tax code oddity which plays a huge role in driving up healthcare costs. If healthcare costs rise more slowly, a greater portion of worker compensation come via wages rather than benefits.
And yes, the S-B plan would raise revenue as a share of GDP to 21% over the long-term vs. a post-war average of around 18%. But even Paul Ryan’s Path to Prosperity doesn’t stick with that 18% number. His plan pegs long-term revenue/GDP to 19%. And if revenue surges as a result of more economic growth, so be it.
And the political benefits would immense. Romney would be adopting the plan of Obama’s own bipartisan debt commission, which Obama stiff-armed after promising Simpson and Bowles that he would endorse its recommendations. (One big reason Obama rejected it is because it lowers marginal rates and keep taxes way too low to finance future liberal spending plans.) Romney would look like a leader who wants to get things done in 2013. And since the plan would actually result in Romney paying a great percentage of his income in taxes, it would help inoculate him on the fairness issue.
Is S-B my ideal tax code? Nope. I have frequently blogged on others I would prefer, such as a flat consumption tax. But this would be a huge improvement over the current tax code, plus it already has a a built-in core of support on Capitol Hill. I can actually envision this plan passing, along with Paul Ryan’s premium support reform, in 2013. Both would be huge steps forward in boosting growth, cutting debt, and reducing uncertainty and the risk of a financial shock.