Broaden the base. Don’t touch the rates.

Governor Romney has proposed cutting federal income tax rates by 20 percent, and paying for this by removing various loopholes and deductions. The math doesn’t add up, which is a problem. Even if the revenue numbers did work, “broaden the base, lower the rates” provides a seductive but poor guide to tax policy.  The approach is appealing. It brings back memories of the 1986 tax reform, a high point of policy-wonk legislative excellence.  In its time, that bill was a genuine triumph of bipartisan policymaking to improve tax policy. Every competent microeconomic student should be able to explain why the deadweight loss associated with taxes is reduced when one can impose low rates on a broad base of income.

Unfortunately, that approach provides a poor guide for today. The fruit is less ripe for the picking. Today’s marginal tax rates are lower than they were a quarter-century ago. Moreover, even if one managed to broaden the tax base, various loopholes and deductions for individuals and corporations would find their way back into the tax code. That’s exactly what happened to the 1986 tax reform. It was well-crafted as a piece of static policy. It was not well-designed to mobilize friendly constituencies or to construct institutional defenses that would make that worthy law politically sustainable.

Perhaps a transparent dollar cap on deductions–the most interesting policy idea Romney has proposed–would work better. Yet as Eric Patashnik’s terrific book Reforms at risk: What happens after major policy changes are enacted makes clear, the overall approach pursued in 1986 politically unravelled. The most likely outcome today would be to lower the rates, and then to gradually allow new tax breaks into the code, balloon the deficit, and frame political debate around the idea that marginal tax rates must be as low as possible.

As Tim Noah observes here, we need to raise taxes, not reform them. Since I’m not running for anything, I can announce a politically DOA tax plan. Let’s put in a dollar-cap on deductions and exemptions for items such as health insurance coverage. And then let’s just stop there. We need the money.

Comments

  1. Ken Rhodes says

    Relate the “deadweight loss associated with taxes” to the crushing burden of the Clinton years, when raising taxes on the upper brackets plunged us into an eight-year recession.

    And one would think by the doom-sounding terminology that the rates on high incomes during the Eisenhower years would have thrown our country into an irrecoverable depression.

  2. CharlesWT says

    We need the money.”

    Some of the rest of us find it a bit scary when private citizens identify with government.

    • John G says

      Why is that, in a democracy? The government should represent us and in a meaningful sense *be* us. We, the people, in law-making and governing bodies assembled, need the money – to spend on what we, the people, want, our wants being expressed by the laws and policies determined in those bodies.

      I recognize that theory and practice only sometimes overlap, but it’s fair, it should indeed be more common, that a public-spirited citizen think of the government as ‘we’. We are the beneficiaries of the common causes.

    • J. Michael Neal says

      Some of us find it a bit scary when private citizens refuse to identify with their democratically elected government.

    • MobiusKlein says

      We are the government.
      I find countries where the government is the Other are worse.

      E.g. Iraq with the Shia / Sunni divide.
      Rwanda, and others too.

      This is why I despise all the Red state Blue state nonsense. Are we trying to engender a civil war?

  3. says

    While we are capping deductions, how about we eliminate the income ceilings on FICA, “broadening the base” for Social Security & Medicare as well (for which we also need the money), and making these famously regressive payroll taxes less regressive.

    • Dennis says

      And while we’re at that, let’s impose a securities transaction tax (and credit that to Medicare/Medicaid) and close the “retained earnings” loophole Mittens and his buddies use. Call it “payment in lieu of taxes” if you want.

  4. Tony P. says

    Romney’s latest pitch is “revenue-neutral” tax reform. Let’s think about that phrase.

    Revenue-neutral: you and I together pay the same total number of dollars to the Treasury.
    Tax reform: your individual tax bill changes, my individual tax bill changes.

    Simple arithmetic: if your tax bill goes down, mine has to go up.

    If your tax bill and mine (and the tax bills of each of our 300 million closest friends) stayed the same, that would be “revenue-neutral”, all right, but it would be pretty pointless “reform”. If your tax bill and mine both went down, we’d welcome the “tax reform”, no doubt, but it would not be revenue-neutral — by definition!

    Phrases like “revenue-neutral tax reform” and “cut the rates, broaden the base” are just politician-speak for “Let’s cut taxes for some people, and raise taxes for other people.” Smarmy, weasely politicians (and not just smarmy, weasely politicians named Romney) spout this politician-speak in ways calculated to make at least 51% of voters believe they fall into the “some people” category.

    But you can’t blame the politicians, really. The fault, my fellow Americans, lies not in our stars but in ourselves. We The People are too politically immature to acknowledge that tax policy is simply class warfare by other means. The rich, like the poor (only more so), are desperate to pay a smaller share of Uncle Sam’s revenue themselves, and let the other class make up the difference. But neither of them will say so openly to the “middle” class — the class that defines “average” when it comes to political maturity as well as financial status.

    –TP

    • JS says

      Revenue-neutral: you and I together pay the same total number of dollars to the Treasury.
      Tax reform: your individual tax bill changes, my individual tax bill changes.

      Simple arithmetic: if your tax bill goes down, mine has to go up.

      So you’re saying Romney’s a redistributionist?

      Of course we already knew that, but I’d really like to see people call Romney out for this, as the GOP has turned it into a slur since Joe the non-Plumber.

  5. Don says

    I’d like to see a net worth tax on people with a net worth beyond $1 million. It’s the appropriate remedy for a generation of upward redistribution of wealth.

  6. Robert Waldmann says

    Evidently I am not a competent microeconomics student as I do not see how you can make a proof about rate lowering and base broadening without knowing anything about the base broadening.

    I’m sure you can explain why it would reduce deadweight loss to tax the benefit in kind of vaccines and statins, discount postage on books, scholarships, pell grants and student loans and tax corporate R&D as profits, but I sure can’t. I can’t even see why eliminating the deduction for charitable giving would reduce dead weight loss. Of course there is no reason to favor charitable giving, unless, of course, you assume that people aren’t quite 100% selfish so some charitable giving generates positive externalities.

    I know lets broaden the base of the corporate income tax by taxing profits gross of depreciation (and of course eliminating the investment tax credit). Why should we care if profits are reinvested or paid as dividends. The aim is to eliminate the inefficient tax favoritism for reinvestment which hampers capital formation.

    Your claim requires the conclusion that with no ACA it would have been a good idea to tax employer provided health insurance as income. Obviously uninsured people don’t create any sort of externality because if they get sick they just get cost-less care in emergency rooms.
    I understand that you are expressing skepticism about base broadening and rate cutting, but your claim is just so broad that it can’t possibly be correct. You must assume that there are no externalities at all to reach your result. Oh and perfect competition etc. Yes micro economics students (in courses other than mine) tend to be taught to imagine silly special cases in which base broadening and rate lowering would be an improvement, but that doesn’t make the claim true.

    I think you meant “Every competent microeconomic student can come up with a model in which the deadweight loss associated with taxes is reduced when one can impose low rates on a broad base of income.” But come with a model in which doesn’t amount to much. In fact, I think it doesn’t amount to anything at all.

    • MobiusKlein says

      My understanding is that deadweight losses from taxes come from folks changing behavior and spending on things they don’t truly need / want because of tax gyrations.

      Also, all the cash and time spent on accountants to perform said gyrations.

      Not sure how much that all adds up to.

  7. Robert Waldmann says

    Sorry for the intemperate comment above.

    I have a question about your title. It asserts that you absolutely oppose raising the tax rate say on income over $1,000,000 above Clinton era rates. Is that what you meant ? I would guess that you really believe in broadening the base and raising some rates (it would be odd if you thought that either current law or current policy were exactly optimal). I think that somehow the debate has become whether rates should be cut (not that there is all that much debate inside the Washington beltway where all seem to agree that they should). I don’t think it is best to surrender to concede much then try to stake out a position and hold the line exactly. If one aims for exactly zero, one will get less.

    I think the 86 reform is much loved partly because it was genuinely bipartisan. I think it is also loved because its original proponents, Kemp and Bradley, were sincerely moved by public spirit. Finally, I think some reform was made necessary by the ill conceived 1981 Kemp Roth reform. In particular accelerated depreciation along with low capital gains tax rates created a huge boom in tax sheltering and an unsustainable commercial real estate bubble.

    But I don’t think the post 86 tax code had any notable advantages compared to the pre-81 tax code. I am passing over the fact that it left the deficit huge being revenue neutral. I am not aware of convincing evidence of lower dead weight losses due to lower rates after 1986 (I am mainly thinking of the extraordinarily unconvincing work by Martin Feldstein).

    It is simply a fact (pointed out to me today by my student Santo Milasi) that in the widely available data set on top marginal tax rates, the top marginal tax rate is positively correlated with the rate of GDP growth (the data set covers 47 countries some back until 1950). What is the evidence that rates lower than current rates would cause a detectable reduction in dead weight losses ?

  8. Dave Francis says

    Illegal aliens are being given our jobs, when there is still suffering from 24 million Americans without work? They smuggle their unborn babies into the country, so that taxpayers are forced to cover their every monetary need? Neither the Democrats nor Republicans will pass the “Legal Workforce Act or the “Birthright Citizenship Bill” to stop either travesty. Join your local TEA PARTY of the rising 41 million Americans or Legal Residents and they will not only get these laws passed, but halt the illegal immigration once and for all. The TEA PARTY is being absorbed into the Republican Party, with the intent to alter the direction that both corrupt parties are taken us? The TEA PARTY “The Peoples Party” can no sit by and watch the Democrats spending our hard-earned dollars to support the illegal alien invasion; placing official obstacles to halt energy companies drilling for oil on the “Peoples Lands” Closing down coal mines in Virginia, after the companies spending millions of dollars to produce clean coal, while this administration allows gasoline prices to leap upwards. Learn more about the healthy agenda of the TEA PARTY at TEA PARTY.ORG. The only Americans, residents and illegal aliens who are going to collect any bounty under President Obama returning are the “Freeloaders”. The wealth people have accumulated isn’t even going to make a dent on the 16 trillion dollar meltdown, with 4 trillion placed on the backs of all of us. One thing the rich accomplish is risking everything, but in addition creates jobs, hundreds of thousands or millions of good jobs.

    In the eyes of a Liberal Progressives, an 81-year old grandma with a cardboard sign of the TEA PARTY is more lethal than a crazed terrorist zealot with a machete whose sole intent is to murder. The Obama administration will not even call these fanatics “Terrorists” or murderers, even after the Twin Towers massacre of 9/11? If the Global Communist Obama Czars were to grab America they would: Burn all American heritage books; Destroy the red, white and blue; Shred the U.S. Constitution; Defund and disband our military; Eliminate free speech; Takeaway our guns. I hope you get what I am saying here. The world is falling apart because America is falling apart. Islamic terrorists smell the weakness in Obama—and they will take advantage to strike. The coming year the new president could face: Crash of the dollar; Wall Street failures; Unemployment hitting astronomical highs; Work force vilification; Nuclear War in the making with Iran. The 37 Liberal communist Czars in the Obama government are determined to rip the heart out of this sovereign nation. He is already distributing Food Stamps to foreign nationals and he has already promised to pass a Comprehensive Immigration package if he wins in November. If that wasn’t enough, with the Sanctuary City in California spending 160 million dollars every two months, according to the Department of Health Services, the Liberals want to grant drivers licenses to illegal immigrants and migrants.

    The Tea Party must be a positive force for America. Return decay into growth; Immorality into wholesome traditional values; Sick spiritually into Judeo/Christian values; take away our right to free choice; Political ineptness into conservative government and rid ourselves of “Political Correctness”. I have never condoned violence to change a political nightmare, but the American people are sick and tired of the Liberals destroying our freedoms. It is not beyond anybodies imagination that these political idiots at either state or municipal level, are going to be in the crosshairs of a sniper rifle? If you read the ultra Liberal-Communist-Marxist and extreme socialists Journalist and newsmen in the Huffington post, New York Post, the Los Angeles Times and other corrupted news media so you are being programmed for a new world order, that is part of Obama’s ideology. This President and his Czars were adamant in allowing the United Nations have a specialized world tax to fulfill their agenda, behind our backs.