“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.