Thursday, November 18, 2004

Class war?

Brad DeLong (http://www.j-bradford-delong.net/movable_type/) and others view reports about the Bush Administration's tax reform deliberations as indicating "the next round of its class war for the rich and against the middle class." In particular, they note that the Administration is said to be planning to scrap state and local tax deductions along with business tax deductions for employer-provided health insurance. All this to help pay for flatter rates and cutting or eliminating the tax burden on saving and investment.
Plus, the Administration may eliminate the alternative minimum tax (AMT) rather than simply raising and indexing the exemption amounts so that it goes back to being a tax just on rich people.
Brad et al are right to see these changes as helping the rich at the expense of the middle class. And they are probably right about the Administration's distributional aims. But let's be fair about this.
The dominant view among tax academics is that allowing deductions for individuals' state and local taxes is probably a bad idea, because it is generally more reasonable to assume that taxes are a proxy for untaxed personal benefits than to assume that the two are totally unrelated (although admittedly the relationship is quite rough). So the deduction provides a tax incentive for public provision of services at the state and local levels even where private provision would otherwise be better.
The exclusion for employer-provided health insurance (which I take the Administration to be targeting indirectly if it denies business deductions) encourages over-insurance for routine expenditures, while also structuring the insurance market to worsen the difficulties for those who aren't insured through work. Recent empirical work by economists suggests that the exclusion has done more to promote over-insurance for the routine items than to increase the percentage of people who are insured, although admittedly it does some of each.
The third idea, eliminating the AMT rather than just restoring it to its 1986 levels, also makes sense, all else equal (an important caveat). Nuremberg-style confession of the day: I helped draft the AMT, and also wrote about it way back when [The New Alternative Minimum Tax: Perception, Reality, and Strategy, 66 Taxes 91 (1988) - see also Tax Simplification and the Alternative Minimum Tax, 91 Tax Notes 1455 (May 28, 2001)]. But I realized early on that no sane tax system would include it, all else equal. The only good case for having it is that clearly superior alternatives, such as trading it in for a somewhat better regular tax, might be politically unavailable.
Anyway, all these are to a degree good tax policy ideas. At least, they are good in efficiency terms. In principle, moreover - another important caveat - they wouldn't have to result in a bad package distributionally if there were proper adjustments elsewhere.
There will be plenty of time to snicker (or cry) later if the Administration's tax reform package lives up to the worst expectations of its critics. By the way, no knowledgeable person could reasonably prefer a national sales tax to a VAT unless she considers facilitating evasion a positive good. But let's keep straight about the details, if only in the surmise that sometime in the distant future, when the Republican Party has returned to its senses (a la Reagan, who repeatedly cooperated with the Democrats in tax and entitlements policy from 1982 through 1988) a reasonable bipartisan package will be feasible.

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