Economics, Pethokoukis

Is tax reform being oversold?

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“Lower the rates and broaden the base” is the mantra of tax reformers everywhere. But Ramesh Ponnuru has his doubts about the wisdom of doing so:

Almost everyone thinks we should broaden the tax base; that is, reduce the number and size of tax deductions, exclusions and credits. … As pleasing as it is to find a consensus in this polarized era, this one is mistaken. It would be either undesirable or politically impossible to reduce the largest loopholes in the code.

Then Ponnoru goes through the major tax expenditures, one by one:

1. The employer-provided health insurance exclusion? Modify it to boost the individual market but don’t expect budgetary savings.

2. Tax breaks on savings and investment such as the low tax rates on capital gains and dividend income? They partially correct the code’s bias against saving and investment.

3. The mortgage-interest deduction? Too tough politically.

4. Children’s tax credit? Expand it in recognition of the economic investment parents make to the benefit of the nation, including the creation of a future generation of payroll tax payers.

5. The deduction for charitable contributions? Too much giving to the non-government sector is hardly a problem.

6. The deductibility of state and local taxes? Like the mortgage interest deductions, scaling it back or phasing it out makes economic sense but is awfully tough politically.

So now what? Certainly some income can be raised through tax reform, and that dough can then be used for deficit reduction or to lower rates. But as Ponnuru points out, some tax reform would be anti-growth, so you have to be careful. I think both the children’s tax credit and the tax break on investment income fall into the pro-growth category broadly construed. Alan Viard on the latter point:

If it’s done right, though, base broadening need not worsen the income tax’s other structural bias: its penalty on saving. Republicans should remain on guard against proposals to curtail tax “preferences” that ameliorate the saving penalty. They should particularly resist calls to increase taxes on dividends and capital gains on corporate stock – because that income has already been taxed at the corporate level, lower tax rates at the individual level are necessary to counteract double taxation.

And you don’t want to raise the tax burden on middle-income families. Again, I favor the Stein Plan and the Viard Plan and possibly paths forward.

8 thoughts on “Is tax reform being oversold?

  1. You’ve been pushing tax reform as the key to economic growth for years, and now when it looks like tax reform may be part of a deal with Obama, you think it’s being oversold.

    Pick which one you are a conservative economist or a republican partisan

  2. re: ” So now what?”

    this is what Romney was saying and he never would deal with the specifics.

    Then Boehmer tried to trade un-specified “reforms” for cutting the marginal rate and no dice as the President wasn’t buying it from him either.

    and who says that cutting tax deductions is not increasing taxes anyhow? Are you not increasing taxes on those with deductions just as surely as you would with increases in the marginal rates?

    This is the GOPs big problem.

    They have a 16T debt and a trillion dollar deficit that they helped to create and they don’t want to pay the bills now that they’ve come due.

  3. The best reason for tax reform is to simplify the process and make tax compliance easy and inexpensive. Current compliance costs are about $300 billion per year. It is a waste of 2% of our economy, and it happens every year. Complexity is wasted motion. Virtually no politicians are talking about compliance costs.

    • ” The best reason for tax reform is to simplify the process”

      true – but is that really realistic?

      want to simplify taxes?

      get rid of itemized deductions and give capped credits to everyone for donations, mortgages, health insurance, etc.

      there is no itemizing.

      you write down your credits (and keep documentation to prove it).

      everyone gets the credits not just those who can meet thresholds.

      you do it all on a 1040EZ

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