By James Kwak
Floyd Norris has written another good column skewering the Republican candidates’ tax proposals. It’s not hard: all you have to do is list the many ways they want to cut taxes—which make George W. Bush look like a veritable communist, out to confiscate all private wealth—and point out the vast increase in budget deficits that would follow.
Near the end, Norris has this paragraph:
To some deficit hawks, like Maya MacGuineas, the president of the Committee for a Responsible Federal Budget, the campaign so far has been a disappointment. In tax policy circles, she said, there has been growing agreement that a reform similar to the 1986 Reagan tax reform is needed — cutting rates and eliminating loopholes and deductions. But while that reform was revenue-neutral, she said, this one would need to raise revenue.
I wouldn’t call myself a member of “tax policy circles,” so maybe there is such a consensus. “Cutting rates and eliminating loopholes and deductions” was a feature of Bowles-Simpson, Domenici-Rivlin, and the Gang of Six. But that doesn’t make it right.
Eliminating loopholes and deductions obviously makes sense, both because of the distortions they create and because of the growing national debt. This is something I’ve argued for myself. But why do we need to lower rates? Today’s tax rates were set by George W. Bush in 2001 and are considerably lower than the rates that prevailed under Bill Clinton and, for that matter, during most of the history of the income tax. The tax rates on capital gains and dividends, in particular, are at their lowest levels since before World War II. For those of you who care about global competitiveness, total taxes in the United States are lower than in most other advanced industrialized countries. Given the expected growth in the national debt due to demographic shifts and health care inflation, the obvious thing to do would be to simply return to Clinton-era tax rates.
The need to lower rates is not economic, but political. The simple fact is that given the Republican Party of Grover Norquist, you cannot get a single prominent Republican to sign on to a tax plan that does not cut tax rates. Ergo, if you want to call yourself bipartisan, you have to cut rates. But that doesn’t mean it’s right; that just means that the Republicans have successfully eliminated their negotiating room, forcing would-be centrists to cave in to their demands.
MacGuineas did say that tax reform this time would have to increase revenue. That sounds good—until you realize what “increase” means. Bowles-Simpson, Domenici-Rivlin, and the Gang of Six would all drastically reduce tax revenue from the levels dictated by current law.
Remember, under current law the Bush tax cuts all expire. These “centrist” plans only “increase” tax revenue by first adopting a baseline in which the Bush tax cuts are made permanent. That’s how the Gang of Six plan promised to “provide $1 trillion in additional revenue” while at the same time providing “net tax relief of $1.5 trillion.” Bowles-Simpson promised $180 billion in additional tax revenues in 2020—but their baseline assumed the continuation of the Bush tax cuts, which would reduce 2020 tax revenues by more than $500 billion. Domenici-Rivlin increased tax revenues by $435 billion over 2012–2020, but also only after making the Bush tax cuts permanent, costing almost $1.4 trillion over that period.* In each case, the “increased” tax revenue is only a small fraction of the tax revenue sacrificed to the Bush tax cuts.
Now, you may think that the appropriate level of taxes is just slightly above the level set by George W. Bush in 2001 and 2003. You may want to make the Bush tax cuts permanent and then trade off fewer loopholes for lower rates. But if that’s what you think, just come out and say it. Don’t claim to be increasing taxes in the name of fiscal responsibility.
* The cost of the Bush tax cuts here is from the CBO’s August 2010 estimate and does not include interest on the additional debt.
The Baseline Scenario 
Its a nitemare scenerio alright, I can hear Nancy now crowin if the tax cuts expire it will ruin her economic recovery. And she won’t agree without taking down all the others below her.
Could someone please, actually show us how taxing the rich will help diminish the huge deficit this country has. I am one of the 99% who does not understand how this can be effective government policy.
Thanks.
It’s effective government policy from the standpoint of achieving votes – attack a hated/envied minority with “benefits” received by the majority. Whether it increases tax revenues (increasing rates isn’t sufficient to arrive at that outcome) is only part of the pie IMO. Consumption, specifically mpc for taxed groups, and labour hours need to be analyzed. There is a reason why those countries with higher tax rates work a lot less than the united states – and it’s not because they are lazy. Increasing tax revenue at the cost of GDP is far from ideal.
“It’s not hard: all you have to do is list the many ways they want to cut taxes—which make George W. Bush look like a veritable communist, out to confiscate all private wealth—and point out the vast increase in budget deficits that would follow.”
More disappointingly biased reporting. It’s like beating a dead horse. Everyone knows that liberal or left-leaning economists favor models that make tax cuts appear to raise the deficit. Meanwhile, everyone know that L/libertarian and conservative leaning economists believe the empirical deficit increases are better explained by other factors and that tax cuts can reduce the deficit if out-of-control government spending is curbed. Both sides of the story have valid points; no side is a clear winner.
But Simon and James continue to spout off scary figures, often taking the scenarios that the CBO and CRFB describe as pessimistic and unlikely, and trumping them up to be the unavoidable consequence of any whiff of non-left philosophy.
I don’t think I’ve ever seen a left-sympathizing economics blog as affected by confirmation bias as this one.
Bob, have you read zerohedge? This blog is right-wing by comparison.
People need to remember that the tax rates themselves don’t encompass “taxes” in their entirety; rather, they are period 1 taxes. Any increase to the deficit/debt is also an increase in taxes – future taxes. Politics is a funny game where semantics take precedence over sound theory.
Quack says, “Don’t claim to be increasing taxes in the name of fiscal responsibility.”
Well, Quack: Don’t claim to be increasing spending in the name of fiscal responsibility.
bob says: “..models that make tax cuts appear to raise the deficit.” Taken on it’s own, how can a tax cut not raise the deficit?
Uh, our taxe system is extremely complicated because of the variety of wealth theft our government likes to enforce: capital gains, inheritance, prize, income, sales, etc. Increasing taxes on wages has shown to reduce the number of hours that individuals will dedicate to the market. Just take a look at government receipts in the 2000 years. Bush tax cuts went into place during 2001 and 2003, and aside from the decrease during the adjustment from the technology bubble, tax receipts grew up to the beginning of the most recent recession.
http://research.stlouisfed.org/fred2/graph/?s%5B1%5D%5Bid%5D=FYFR
Take a log transformation, and the growth of receipts is also higher at some points – juxtaposed to the end of the clinton administration’s higher tax regime.
http://research.stlouisfed.org/fred2/graph/?s%5B1%5D%5Bid%5D=FYFR
I find generally that the various “visions” of tax reform offered by the three designated “committees” with goals to make sense of programs to decrease our deficits and debt, are absurd at worst, and just simply harmful at best. Each seems to be geared to can kicking obfuscation devised to protect the 1% at all costs. I am completely in favor of tax reform. If I were king (as you have written elsewhere), I would toss out the entire current tax code, and enact a new one with virtually no loopholes, tax subsidies, or, generally, any real attempts at social engineering (which are rife in our current code). I would do away with even the mortgage interest deduction and most of the charitable conttribution deduction (or maybe all), and other “pet” popular deductions. Most of us have no idea why the code runs to some 15,000 pages, because most of us are presently affected, as to our individual tax returns, by far less than 10% of that colossal fiasco of govenance. The only real tax reform which could change the trajectory of our national fiscal well being, individually and corporately, would be one where virtually the entire present law is overturned, and we start essentially from scratch.
Taxation, at its very core, is about collecting the funds necessary to fund the things that government is tasked with doing. That is with funding those things that individuals can’t do themselves, like provide for national defence and security, personal security (police), the provision of services for the elderly, crippled, and others who are, for various reasons, incapable of doing for themselves, provide for water, transportation infrastructure, etc.. At present we have a two pronged problem. We do too much through the government that should not be done (our military is more than twice as costly as it should be since we don’t really need to be the world’s cop, we don’t need 16 agencies with vastly overlapping responsiblities providing for national security, and a vast number of other costly superfluous programs, many of which are costly, redundant, and essentially just plain unnecessary). The problem with our present system of taxation vis a vis our expense profile, is that it is simply insuffient in what it generates to create fiscal balance. Politically there is virtually no possibility of that changing owing to the effects of the control of wealth over the act of governing. Without reform in election laws, lobbying laws, term limits, etc., the present system, which is completely out of control, will continue, and we won’t get any rational sensible answers to the problems involving taxation and expenditure, and our national decline will continue its present trajectory — south at high speed.
Are the 1% that bad? I’m far from a 1%er, but I am curious to study the “group” when I have more time. Considering our tax system on capital gains, I’d actually hypothesize that the composition of 1%ers changes quite frequently. Small businesses encompass a significant portion of the US economy, and as those businesses get sold, the wealth of the proprietors JUMPS significantly for that one-period. Should we look at that jump as an economic rent well above what they should be compensated, or rather as wealth those individuals had foregone during the 10-15 struggle to build those businesses? Again, I really don’t know, but it would likely be interesting to look at. I believe current analysis that relies on the gini coefficient takes too broad of a macro view of the issue.
“Ergo, if you want to call yourself bipartisan, you have to cut rates.”
Actually this is nothing but ‘bait-and-switch’. They claim cutting rates will raise revenue once we get rid of all the loopholes! Only once they cut the rates, all the loopholes come roaring back.
That’s exactly what happened with Reagan in 1986. Just go back and have a look. It’s all flimflam.
Leo, you are precisely right. So long as the plutocracy controls law making and tax policy, we are destined to be exposed to such obfuscation and deception in Congress and the White House. Although I am a subcriber to the idea of cleansing the US Tax Code (eliminating at least 69,000 of the 70,000 pages) and thusly eliminating the massive public defrauding which it codifies and perpetuates, there is no doubt that in the present political environment controlled entirely by the beneficiaries of the tax law, it will continue. What happened to the prime thrust of the original (and now corrupted) Tea Party which was the same as the original, a protest against taxation without representation? This is true today as much as it was before we separated ourselves from the King of England and his theft of our lives and assets.