Economics, Pethokoukis

Would letting all the Bush tax cuts expire make tax reform easier?

My great pal Tony Fratto over at Hamilton Place Strategies is talking up the “benefits to allowing my favored Bush income tax rates to expire and return to Clinton-era tax rates for everyone.” While emphasizing the Clinton-era tax code is “suboptimal,” Fratto — a deputy press secretary to President George W. Bush — thinks a reversion would make it easier to eventually accomplish major tax reform. Fratto:

The Obama plan of only raising the top two rates on the wealthiest Americans kills any chance of income tax reform. This is important to understand: tax reform was always going to be a long shot. The forces arrayed against reform are numerous, well-organized, well-financed, dispersed across the country, and are often sympathetic groups: charities, state and local governments, the housing industry, and homeowners, just to name a few.

But tax reform becomes practically and politically impossible if the tax burden is skewed to the top as the Obama plan intends. In fact, the wealthiest Americans will face an even higher top marginal tax rate than under the Clinton years due to the increased Medicare payroll and investment taxes in Obamacare. Tax reform requires creating winners, and the pool of winners has to come from people paying taxes. Those not paying taxes today have absolutely nothing to gain from tax reform. In fact, if we only raise the top two rates, the only people who would gain from income tax reform would be the wealthy. And we can’t help the wealthy, so…no tax reform.

The Clinton tax rates create a much better basis for tax reform because more Americans will actually be paying taxes and can benefit from reform.

Now let me see if I understand this clever bit of political strategery. In other words, you have to give a critical mass of voters some skin in the game. By raising middle-class income taxes today, you could then cut them tomorrow as part of reform that would lower tax rates (at least for them) and broaden the tax base to create a more efficient, pro-growth tax code. “Yes, I am scaling back your housing/healthcare/state and local tax break, but I am also lowering your marginal tax rate.”

Now Tony is right that the current makeup of the tax code does make it tough to do CBO-approved, revenue-neutral tax reform, as Mitt Romney found out. But I have some concerns/questions/observations (beyond concerns about a nasty 2013 recession):

1. What if Democrats decide to keep the money with no tax reform? All else equal, letting the Bush tax cuts expire would, according to the CBO, give government a gusher of money, an additional $5.1 trillion over a decade.Tax revenue as a share of GDP would average 20.6% from 2013-2012 vs.18.1% if we keep the Bush tax cuts (or about the post-WWII average).

2. With higher tax revenues, wouldn’t any near- or medium-term pressure to do entitlement reform evaporate? While annual deficits might be lower, the Medicare-Medicaid-Social Security debt bomb would still be ticking, and the longer we wait to act, the more dramatic reform will need to be.

3. If you are looking for middle-class, tax-reform sweetener, what about cutting payroll and investment taxes?

I will continue to think about this …

41 thoughts on “Would letting all the Bush tax cuts expire make tax reform easier?

  1. return to Clinton-era tax rates“…

    Funny how you don’t ever seem to hear how these leftists parasites want to return to the Clinton era spending rates (in actual dollar amounts) though…

    Why is that?

  2. what is “tax reform” is not a tax increase on those who currently benefit from the tax code?

    why is tax reform, i.e. raising taxes on those who currrently get deductions ‘better’ than increased taxes via the marginal rate?

    Most folks don’t itemize taxes. they don’t benefit from the tax code and a tax increase on them would be negligible.

    so why is it better to hit people who utilize deductions rather than everyone?

    of course this whole dialogue is a cynical diversion from the bigger issue that we have a trillion dollar structural deficit and a 16 trillion dollar debt that we already owe.

    The correct question is how will we pay back the debt?

    right now we are arguing about the deck chairs .

    • what is “tax reform” is not a tax increase on those who currently benefit from the tax code?

      why is tax reform, i.e. raising taxes on those who currrently get deductions ‘better’ than increased taxes via the marginal rate?“…

      Can someone interpret this please?

      • you need help deciding if marginal rates are different from tax deductions?

        it would seem that increased marginal rates help those that can’t take advantage of itemized tax deductions, no?

  3. I understand the argument being presented here, but I don’t agree.

    When the taxes are raised, the government will keep the revenue and not lower them in the future (assuming there is extra revenue, a dubious claim at best). Governments are very reluctant to give up any power they have, whether it be legislative or though taxation.

  4. “I will continue to think about this …”

    You do that, Jim. We’ll all be waiting with baited breath.

    Y’know, there is a little issue I wanted to take up with you. Y’know all that talk you’ve been giving us about “broadening the base,” how so many people don’t pay any Federal taxes??

    Well, wasn’t that YOUR idea? I mean, Jim, you must have supported the Hubbard/Mankiw tax policy lock, stock and barrel, and you DID like dropping marginal brackets while retaining all of those deductibles. At least you said so at the time.

    And since, as we ALL KNOW THAT LOWER TAXES HAVE AN UNARGUABLY POSITIVE AFFECT ON THE ECONOMY, IRREGARDLESS OF ANY OTHER EXTANT FACTORS, well, Jim, if paying LOWER taxes are good, WHY AREN’T PAYING NO TAXES GOOD or even BETTER?

    The way you’ve been telling it, Jim, is that if we have fewer and fewer people paying less and less, we should have a condition of permanent economic prosperity. Isn’t that what the AEI, Heritage, the Club for Growth and all of these other “institutions” have promised us all this time?

    But you seem to object to a great mass of people paying no tax at all.

    I’m confused. Can you explain this apparent policy contradiction?

    • I assume you’ve never heard of a bell curve? Or the concept of “point of diminishing returns?” Otherwise you’d make a more educated argument.

      The government requires monetary resources to operate. Without government we have anarchy. Anarchy is bad for the economy. On the other hand too much government and taxes that are too high is also bad for the economy. The trick is to find the point of diminishing returns. We can debate where that point is but leave your straw men and red herrings out of adult conversations please.

      • Did Reagan and Clinton exceed the point of diminishing returns?

        Seems like Clinton had a higher marginal rate and no deficit – no rebellion and no anarchy.

          • what did they not have to deal with? partisans lying their asses off for starters.

            where is the supporting data for the synthesized data in the chart?

            “Republican Staff “calculations” FROM CBO is not worth warm spit – and for good reason. The GOP and their lovers can’t tell the truth to save their sorry lard asses.

          • what did they not have to deal with? partisans lying their asses off for starters“…

            Geez larry g why are you making the assumption everyone is as stupid as you are?

            where is the supporting data for the synthesized data in the chart?“…

            What?!?! Now you’re telling me you can’t read?!?!

            Did you notice the small print at the bottom?

            “Republican Staff “calculations” FROM CBO is not worth warm spit – and for good reason. The GOP and their lovers can’t tell the truth to save their sorry lard asses“…

            Again you’re making the assumption everybody else are as abysmally stupid as you are…

          • 1.3 trillion – is REALLY SLIMY in the CONTEXT of the US budget where the GOP folks INCLUDE 283 billion of State budgets that are NOT in the US budget AND they EXCLUDE the entitlements for DOD military.

            Now JuanDoze, just how SLIMY can you get boy?

          • Still talking stupid, eh larry g?

            1.3 trillion – is REALLY SLIMY in the CONTEXT of the US budget where the GOP folks INCLUDE 283 billion of State budgets that are NOT in the US budget AND they EXCLUDE the entitlements for DOD military“…

            This idiotic babble makes no sense at all but then again I’m not suprised…

          • try dealing in facts JuanDOZE and try getting info from people who are interested in dealing with the facts.

            The GOP committee report you cite is underhanded and dishonest and you seem to gravitate towards stuff like that.

            the TRUTH is this. we have about 750 in entitlements if you include stuff like PELL grants and community development grants which includes things like COPs grants.

            You EXCLUDE things like farm subsidies and DOD entitlements.

            and the number for “Defense” is about 1/2 the real number when you include things like Homeland Security, National Intelligence, GITMO, etc.

            so you’re totally dishonest about the numbers…and proud of it…

          • Poor larry g, he just can’t stop himself: “The GOP committee report you cite is underhanded and dishonest and you seem to gravitate towards stuff like that“…

            He says this without a wiff of anything credible to back it up…

            Aren’t you tired of looking the fool?

            the TRUTH is this. we have about 750 in entitlements if you include stuff like PELL grants and community development grants which includes things like COPs grants“…

            Guess what stupid? I don’t give a damn what they are…

            If YOU want them then why don’t YOU volunteer to pay for them?

            Yeah, just go ahead a write a check to the Treasury and tell them what you want it spent on…

            I’m sure they’ll oblige you…

            The Treasury also knows an idiot when it sees one…

          • Juan DOZE – Defense INCLUDES DOD plus the VA plus Homeland Security PLUS NASA Satellites PLUS CIA PLUS other national security apparatus

            = 1.4+ trillion dollars…

            but the bigger lie here is that both Reagan and Clinton had higher marginal rates – regardless of what the spending was for – and there was no “diminishing returns’ nor ‘anarchy.

            remember Reagan saying he was going to spend Russia into the ground? well he DID and he raised taxes to pay for it!

          • Juan DOZE – Defense INCLUDES DOD plus the VA plus Homeland Security PLUS NASA Satellites PLUS CIA PLUS other national security apparatus“…

            larry g why the heck do you insist on blathering mindlessly about something you’re totally clueless about?

            I’m guessing you didn’t feel a bit of shame sharing that little delusion, did you?

          • here’s the “staff memo”:

            http://budget.senate.gov/republican/public/index.cfm/files/serve/?File_id=0f87b42d-f182-4b3d-8ae2-fa8ac8a8edad

            notice the from and to have been redacted

            and try to find 1.3 trillion… what’s there is about 745 billion and includes things like PeLL Grants, Head Start, adoption assistance, persons with disabilities but not DOD VA or health care nor farm or ethanol subsidies nor tax free employer-provided healthcare.

            in other words, yet another partisan misrepresentation of the whole truth.

            JuanDoze seems to specialize in this kind of slime…

          • ” Budget Committee staff calculated at least an additional $283 billion in state contributions to those same federal programs,[1] for a total annual expenditure of $1.03 trillion”

            Now JuanDOZE don’t you think it is a tad dishonest to include state expenditures when talking about the effect that entitlements are having on the US budget at the same time you discount the other National Defense spending including DOD entitlements?

            that’s pretty SLIMY….

          • larry g just can’t help himself: “Now JuanDOZE don’t you think it is a tad dishonest to include state expenditures when talking about the effect that entitlements are having on the US budget at the same time you discount the other National Defense spending including DOD entitlements?“…

            Nope! Ever heard of the term ‘unfunded federal mandates‘?

          • ” Ever heard of the term ‘unfunded federal mandates‘?”

            are you INCLUDING DOD and National Defense in those “unfunded mandates”?

          • are you INCLUDING DOD and National Defense in those “unfunded mandates”?“…

            Go read the Constitution you idiot…

          • take a look at this pie chart JuanDOZE:

            http://en.wikipedia.org/wiki/File:U.S._Federal_Spending_-_FY_2011.png

            DOD = 700 Billion
            discretionary = 646 billion
            other mandatory = 465 billion.

            the rest is Social Security, Medicare and Interest.

            If you add 646 billion to 465 billion – that would be all the rest of government like NASA and Homeland security AND entitlements – and it all adds up to 1.11 trillion.

            but your buddies the GOP claim that 1.3 trillion in the budget is entitlements….

            now how does that add up boy?

            it doesn’t. so you’re either gullible as all get out or
            you’re knowingly spreading misinformation.

            come on Juanos.. admit it guy..this IS SLIMY.

          • take a look at this pie chart JuanDOZE“…

            Sorry wiki-boy, you can stare at it all you want but GIGO still reigns supreme…

  5. Juandos.. did the Constitution specify all this spending:

    Defense-related expenditure
    DOD spending $707.5 billion Base budget + “Overseas Contingency Operations”

    FBI counter-terrorism $2.9 billion At least one-third FBI budget.

    International Affairs $5.6–$63.0 billion At minimum, foreign arms sales. At most, entire State budget

    Energy Department, defense-related $21.8 billion
    Veterans Affairs $70.0 billion

    Homeland Security $46.9 billion

    NASA, satellites $3.5–$8.7 billion Between 20% and 50% of NASA’s total budget

    Veterans pensions $54.6 billion

    Other defense-related mandatory spending $8.2 billion

    Interest on debt incurred in past wars $109.1–$431.5 billion Between 23% and 91% of total interest

    Total Spending $1.030–$1.415 trillion

    • larry g continues to brag: “Juandos.. did the Constitution specify all this spending blah. blah. blah“…

      Did you read the Constitution already?

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>