Source: Matt Yglesias
It almost sounds reasonable. “Let’s broaden the federal income tax base by eliminating or reducing tax expenditures,” right-wingers suggest. But then they say, “We’ll make it revenue-neutral by cutting tax rates, especially for the wealthiest Americans!” This kind of tax “reform” would increase both deficits and inequality.
Chuck Marr and Chye-Ching Huang, writing for the Center on Budget and Policy Priorities, explain why this is a risky proposal (PDF):
[W]hile cutting “tax expenditures” sounds appealing in the abstract, cutting specific tax expenditures enough to offset the costs of substantial new rate cuts and contribute meaningfully to deficit reduction would likely prove difficult, if not impossible, to achieve. Indeed, the difficulty of cutting popular tax expenditures — from the mortgage interest deduction to 401(k) tax preferences to the deduction for charitable contributions to the exclusion for employer-sponsored health insurance — is why those who urge policymakers to commit upfront to specific, large rate cuts rarely specify any tax expenditures to cut. In fact, they often highlight tax expenditures that they would refuse to touch, such as the preferential tax rate for capital gains.
Take a look at the pie chart above. “Broadening the tax base” would mean eliminating or reducing the exclusion of employer health insurance, exclusion of pensions, the mortgage interest deduction, the state income tax deduction, the exclusion of Medicare, and other tax expenditures that help the middle class stay out of poverty. And what about the tax breaks that help the poor? The earned income tax credit, child tax credit, and the deduction for charitable contributions would be eliminated.
The tax “reformers” always want to take one of the biggest tax expenditures, the preferential tax rate for capital gains and dividends, off the table because that benefits primarily the 1 Percent. The 1986 Reagan tax reform eliminated the preferential rate, but Congress quickly restored it.
Revenue-neutral tax “reform” would do nothing to solve the long-term deficit problem. First of all, the right-wing proposals for additional tax cuts that go beyond the Bush-Obama Tax Cuts For The Rich are not revenue-neutral. It would be impossible to enact enough tax expenditure cuts to come anywhere near offsetting the cost of the proposed big tax rate cuts. Secondly, tax rates are already at an historic low – this is the primary driver of deficits. More revenue is desperately needed, starting with the expiration of the Bush-Obama Tax Cuts For The Rich at the end of this year. But the Washington politicians and right-wing think tanks are already calling that “Taxmaggedon,” as if the restoration of the Clinton-era tax rates could be compared to the end of the world!
Let the Bush-Obama tax cuts expire, then we can talk about tax reform that does not benefit the rich and lead to higher deficits and more inequality.
Tax Reform Holds Promise, But If Not Done Carefully, Could Increase The Deficit and Inequality and Harm the Economy (PDF, Center on Budget and Policy Priorities)
The Challenge of Individual Income Tax Reform: An Economic Analysis of Tax Base Broadening (PDF, Congressional Research Service)
The 2012 Long-Term Budget Outlook (Congressional Budget Office)