ARC's 1st Law: As a "progressive" online discussion grows longer, the probability of a nefarious reference to Karl Rove approaches one

Wednesday, November 02, 2005

Tax "Reform" - Rearranging the Deck Chairs

Was glad to see this Op-Ed in the Wall Street Journal today, which confirms some of my fears about the proposed "tax reform" plans:

To pay for AMT relief, the plan limits the housing deduction to $315,000 and the employer health care deduction to $11,000 per worker. There's rough justice in this because the panel discovered that at least two out of three Americans are fated to lose the mortgage deduction due to the encroachment of the AMT. Nonetheless, yesterday the home builders were yelping.

Meanwhile, Democrats from high-tax states, such as New York's Chuck Schumer, are upset because the plan eliminates the deduction for state and local taxes. We say good riddance. This deduction has always unfairly subsidized liberal and often richer states at the expense of states that have lower tax rates, or no income tax at all. Eliminating this deduction would do a favor for residents of New York and California by forcing their politicians to reduce their rates to stay competitive.

But the real economic juice in the Mack plan would come from the gradual shift to taxing consumption instead of income. The plan cuts capital gains and dividend taxes and allows Americans to tuck away at least $20,000 a year in so-called Roth IRA accounts. This nearly quadruples the amount of annual tax free savings for middle-income families.
The disappointment is that the Mack plan leaves tax rates close to where they are now and thus falls well short of where Congress and President Reagan got us in 1986: with two rates of 15% and 28%. The Mack plan has four rates, and it keeps the highest and most economically damaging rate at 35% (although a slimmed-down option would cut that to 33%).

A big part of the explanation for this is that President Bush insisted that Mr. Mack and his friends propose a "revenue neutral" reform. This means that every dollar "lost" from a tax cut had to be made up with a dollar from a tax increase. To make matters worse, the tax panel opted for "static" tax scoring, so it failed to take into account the impact on growth and federal revenues from a more efficient, less onerous tax code.

We have powerful evidence from this past year that when tax rates are lowered on capital gains and investment, the economy grows, the tax base widens and receipts surge (by some $274 billion in fiscal 2005). Had the panel made reasonable estimates of the growth effect from tax cuts, it could have proposed cutting marginal rates even further. This points to the larger Republican failure, during their time in the majority, to reform the Joint Tax Committee and its anti-growth assumptions that make it so difficult to cut taxes.

The Mack plan is already being shot at from all directions -- from high-tax, income-redistribution liberals, and especially from business lobbies intent on protecting their tax subsidies. But even some of our supply-side friends are assailing the panel. The latter are letting the perfect be the enemy of the good. Nearly all of the commission's proposals make economic sense, and if implemented would be the best change in tax policy since the 1981 Reagan tax cuts.

As for the politics, we agree the Mack panel may have made too many pre-emptive compromises. [...] A bolder (and lower-rate) flat tax may also be the only way to galvanize public opinion to defeat the death-by-a-thousand-lobbyists that most reform plans suffer.

While the WSJ likes the fact that the plan is a first step, it has some of the same reservations that I have about it. While it may reduce the number of words in the tax code in the short term, both of the proposals are sure to morph back into massive regulation as time passes.

A few other things... don't know about you, but the increase in the cap on annual Roth IRA contributions to $20 grand won't exactly benefit me. Similarly, keeping 3 or 4 tax brackets with similar rates surely won't help those in the middle class - especially as their mortgage deductions are removed. (However, they'll now feel the pain of the bracket they're in.) The fact that the tax panel was constrained by the revenue neutral criteria AND the static scoring model (which doesn't take into effect economic data showing that lower taxes increase economic growth and thus tax receipts), is a sad statement on the leadership in Congress and the Bush administration.

Yes, I am making the good the enemy of the perfect... but, that's the goal of the panel in the first place. What is the best possible tax system that we should have if were were to design it today. Simply rearranging the deck chairs is not a bold proposal. If this is what was proposed, imagine what will happen as the final legislation approaches passage.

Your Co-Conspirator,
ARC: St Wendeler

Comments (1)
saintknowitall said...

The real answer is the Fair TAx.

Anything else (tax refurm) is mental masturbation.