The voices of Tax Policy Center's researchers and staff
On Wednesday, the Bipartisan Policy Center Debt Reduction Task Force—a bipartisan group of former politicians and government officials—released a plan to tame the national debt. There are big, painful cuts to virtually every spending agency as well as a radical reform of the income tax to raise more revenue in a fair, simple, and efficient way.
I was a member of the panel and played a big role in developing the tax reform plan. Perhaps in a sign that the plan is on the right track, it drew fire from both sides. The left attacked the plan because of the spending cuts and a knee-jerk reaction that the plan must be regressive because it cuts top tax rates and imposes a very broad-based sales tax. It’s actually more progressive than current policy according to the TPC, but never let facts get in the way of a good talking point.
But the most consistent threat to any revenue-raising tax reform is, ironically, a Americans for Tax Reform. Grover Norquist’s group claims that 235 Congressmen and 41 Senators have signed the “taxpayer protection pledge”—a promise to never under any circumstances raise taxes. Thus, the BPC plan and the Bowles-Simpson plan are off limits.
Grover, your pledge isn’t protecting taxpayers. Every time your fellow travelers vote for a deficit (which is to say, almost every year), they vote for higher future taxes. Over the long run, taxes must equal spending. Spending that is not paid for now must be paid, with interest, in the future. As the oil filter commercial used to warn, “you can pay me now, or pay me later.” But the day of reckoning will come.
Any plan that cuts spending reduces the present value of current and future taxes. Our plan, taxes and all, protects future taxpayers much more than the status quo.
What's more, the BPC plan's tax increases largely involve cuts in so-called tax expenditures—that is, spending programs that masquerade as tax cuts. The mortgage interest deduction, for example, is basically a voucher program, but the money comes from the IRS rather than HUD (and the biggest subsidies go to those who least need help).
The BPC plan eliminates most tax expenditures and simplifies the rest so that half of Americans would no longer have to file tax returns. Combined with the modest sales tax, this plan allows the top income tax rate to be cut to 27 percent and eliminates the ultracomplicated AMT. The combination of lower tax rates and fewer loopholes would vastly reduce the incentive to engage in inefficient tax sheltering.
It is classic tax reform, but with lower tax rates and more simplification than Ronald Reagan achieved in the landmark 1986 reform.
One would think that “Americans for Tax Reform” would support this, but ATR loves tax expenditures. In their view, every tax cut is good, even if it looks a lot like a spending program, and every tax increase is bad.
That’s unfortunate. Tax expenditures bloat the government, and are often complex and unfair.
To see why, consider an imaginary new tax expenditure designed to pay for Medicare. Taxpayers could claim a credit of, say, $1.01 for every dollar they voluntarily contribute to the Medicare trust fund. The credit rate could be adjusted each year so that the amount raised just covers the Medicare deficit. There’d also be a millionaires’ surtax designed to offset the cost of the credit. By design, the proposal doesn’t violate the pledge since the new tax exactly offsets the new credit. And with Medicare now “privately financed” (encouraged by the government’s bribe), Congress could zero out direct spending for Medicare. That would save enough to balance the budget (not counting interest) in 2016 and would reduce the deficit more and more as years go on. We could relive the late 1990s pastime of wringing our hands about the risks of eliminating the national debt.
Of course, this goofy scheme does nothing to restrain federal spending, involves the IRS in a whole new line of business (Medicare financing), and is unfair since multi-millionaires would stand the most to gain from the credit. That is, it’s a lot like many existing tax expenditures.
But it doesn’t violate the pledge and if the credit were in the law already, ATR would oppose its repeal even if 90 percent of revenue savings went to deficit reduction. The pledge creates a strong bias in favor of tax expenditures, with all their attendant inefficiency, unfairness, and complexity. The pledge is an almost insuperable barrier to tax reform.
Those who care about good government should throw the pledge overboard. If politically feasible spending cuts do not suffice to balance the budget (they don’t), consider reforming our horrible tax system to pare tax expenditures, cut rates, and raise enough revenue to pay for the government so that we don’t doom our kids to crippling tax burdens.
The BPC plan would be a good start.
Posts and comments are solely the opinion of the author and not that of the Tax Policy Center, Urban Institute, or Brookings Institution.