Wednesday, August 01, 2012

New Tax Policy Center reports

The Tax Policy Center has just issued two excellent new reports, both with Bill Gale as co-author or sole author.  Since Bill will be my colleague at next year's Tax Policy Colloquium, readers are advised to discount accordingly, if they are so minded.

First, On the Distributional Effects of Base-Broadening Tax Reform (co-authored by Gale with Samuel Brown and Adam Looney) evaluates the distributional effects of a base-broadening, revenue-neutral income tax reform, such as the one that is hinted at in Romney's tax plan.  The paper finds that "any revenue-neutral individual income tax change that incorporates the features Governor Romney has proposed would provide large tax cuts to high-income households, and increase the tax burdens on middle- and/or lower-income taxpayers."  Indeed, about 95% of individuals would get a tax increase from the Romney plan, if one is willing to credit it (despite the lack of detail) with being actually revenue-neutral.

This finding comes as no surprise.  Indeed, it is completely inevitable when one looks at the generally falling ratio of tax preferences to income as the latter heads towards stratospheric levels.  (For example, if a homeowner's income goes up tenfold, he or she would be unlikely to move to a house that was ten times as expensive, and thus to claim ten times the previous home mortgage interest deductions even if there were not a statutory ceiling on the loan principal that triggers deductions.)

I have elsewhere expressed great skepticism about the current desirability of 1986-style tax reform, in which the revenue gain from base-broadening is given away to pay for lower individual income tax rates given our long-term fiscal issues and the staggering rise in U.S. inequality over the last 30-plus years.  I view the report as confirmatory of my skepticism about the 1986-style approach (which I call a "good idea whose time has passed"), unless one happens to like the distributional outcome of favoring the people at the very top relative to everyone below them.

But then again, I do not believe that Romney, even with Republicans controlling both houses of Congress, would pass a revenue-neutral plan.  Instead, I would expect the legislation to lower rates significantly, broaden the base only modestly, lose a great deal of revenue, and give people at the top a huge windfall while those at the middle lost little or nothing, at least so far as current-year tax liability was concerned.

The second new Tax Policy Center report, with Gale as sole author, is called The Fiscal Cliff? Let's Pass Right Over It.  Here the argument is that the 1/1/13 "fiscal cliff," in which taxes go up with the expiration of the Bush tax cuts and automatic spending cuts begin, is actually good long-run policy, at least compared to simply continuing current-year policy.  As for the fact that the "fiscal cliff" changes would hurt the short-term economy, that merely calls for enacting other stimulus.

One could put this same point - clearly correct, in my view - as follows.  Suppose we take allowing the fiscal cliff changes to take effect as the baseline.  Against that baseline, we need stimulus.  Of course, given the ongoing unemployment crisis, we already need stimulus today.  But the changes would increase the amount of stimulus that is needed.  Could anyone seriously maintain that, from the standpoint of optimally designing the extra stimulus, we would have it take the form of extending the Bush tax cuts, etcetera?  That view cannot be seriously defended, unless one also favors them as long-term policy.

UPDATE: I see that the two presidential campaigns are sniping at each other with regard to the Gale-Brown-Looney report.  Obama used it as evidence that Romney is "asking you to pay more so that people like him can get a big tax cut.”  Fair enough if one ignores my surmise that in fact Romney would end up blowing a huge hole in the deficit instead.  The Romney campaign replies by disparaging studies from "liberal" groups, but wisely refrains from contesting the report directly.

FURTHER UPDATE: What would be a better defense of the Romney plan (assuming it actually to be revenue-neutral as enacted)?  It would have to emphasize the efficiency and growth benefits of lower marginal rates, both in general and at the top end of the income spectrum.  Note, however, that constant revenue would imply that average tax rates didn't change overall, which in turn would mean that incentives to earn and save would not increase as much as one might have thought from looking purely at the marginal rate changes.

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