Tuesday, October 09, 2012

1986-style tax reform: a good idea whose time has passed

In May 2011, I published an article with the above title, available here

My main argument: while it made plenty of sense in the mid-1980s to implement a tax reform plan that financed significant rate cuts (making the overall plan revenue-neutral) by broadening the base, that approach simply does not make sense today.  Given both the long-term U.S. fiscal gap and the worrying increase in high-end inequality since 1986, cutting the rates is simply not a sensible way to use the budgetary gain that could be generated through base-broadening - at least in the individual income tax, although for the corporate tax it's a closer call.

Whether or not the article had any direct influence, the view it takes appears to be gaining ground, at least on the Democratic side of the aisle.  Senator Charles Schumer is quoted here as criticizing the 1986-style approach, which the Bowles-Simpson proposal employs in significant degree, for reasons that are similar to my own.

Along the same lines, you know the old line that everything happens twice, first as tragedy and then as farce.  The 1986 reform certainly wasn't a tragedy, but you can see it being replayed as farce by the Romney campaign, which claims that the budgetary cost of high-end rate reduction would be completely offset by base-broadening measures that they almost entirely refuse to identify (although Romney's riff about the $17,000 ceiling was admittedly a step forward), notwithstanding the fact that it's been shown, as a matter of arithmetic, that the plan would fall at least $1 trillion short of paying for the high-end rate cuts over the next ten years.

The Reagan Administration in 1984 and 1985, rather than playing this cynical game, actually released two comprehensive proposals (the Treasury I and Treasury II plans) showing exactly how proposed rate cuts would be fully financed over a five-year period, on what was estimated to be a distributionally neutral basis.  But this time around, it's apparently going to be done with faith, and trust, and a generous helping of pixie dust (a.k.a. implausible economic growth projections).

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