Tax VOX
Rep. Paul Ryan, R-Wis., looks on during a campaign event with Republican presidential candidate, former Massachusetts Gov. Mitt Romney at Monterey Mills on Monday, June 18, 2012 in Janesville, Wis. Ryan has said he supports a version of a consumption tax. (Evan Vucci/AP)
Taking a new look at an old consumption tax
Twenty-five years ago, Princeton economist David Bradford designed what he called the X Tax. The idea–a progressive consumption tax–generated lots of discussion among tax experts. Wonks loved it for its elegant simplicity though there were (and are) real questions about how the tax would work in an increasingly international economy and how it would treat financial services.
David’s idea never got much attention beyond the world of tax geeks. But Bob Carroll and Alan Viard, in their new book Progressive Consumption Taxation: The X Tax Revisited (AEI Press 2012), are attempting to bring new attention to the design. Bradford, who was a senior Treasury official in the Ford Administration and a top economic advisor to President George H.W. Bush , died in 2005.
The X Tax is a consumption tax, essentially a European-style value added tax with a couple of key innovations. Most important, unlike many consumption taxes, it is progressive. In effect, the X Tax divides consumption into two pieces—wages and business cash flow. Households are taxed on wages, but unlike a VAT, they pay at progressive rates rather than a single flat rate. Businesses pay one rate on their gross receipts, but get to deduct wages. The top individual rate is equal to the business rate.
Because it is fundamentally progressive, the X Tax addresses the most common criticism of consumption taxes—that they impose a greater burden on low-income households. This happens because people with lower incomes consume more of their money than the rich.
There are other ways to solve this problem. The VAT proposed by Mike Graetz, for instance, would give couples a tax exemption of $100,000 (and provide a rebate for those who owe no tax). Graetz, however, still retains both the individual and business income tax while the X Tax completely replaces the existing system.
Economists will argue over which model makes more sense. But both are worth serious consideration when/if Congress really debates tax reform. Graetz can, and frequently does, speak for himself (with, among other things, great humor). Carroll and Viard deserve a lot of credit for being new voices for Bradford’s old idea.
It is, btw, fascinating that so much of the debate over consumption taxes is among conservatives. These taxes are in extremely bad odor among most Republican politicians these days. Yet, House Budget Committee Chairman Paul Ryan (R-WI) and former GOP presidential hopeful Herman Cain (who could ever forget 9-9-9) both supported versions of such a levy. Bradford, of course, was an aide to GOP presidents. Graetz was a top Treasury official for the first President Bush. And Carroll and Viard are both known as conservative tax scholars.
Bradford understood how controversial consumption taxes can be—that’s why he called his idea an X Tax. But whatever you want to label it, his design is worth consideration. There few new ideas in tax policy, so it never hurts to revisit one of the old ones. Thanks to Bob Carroll and Alan Viard for doing so.
Republican presidential candidate Mitt Romney speaks to supporters at the Holland State Park beach on Tuesday, June 19, 2012. When he wants to be, Romney is quite precise. His tax reform promises often hinge on technical but very important distinctions, so listen carefully. (Chris Clark/The Grand Rapids Press/AP)
Listen closely when Candidate Romney talks taxes
When Mitt Romney talks about his plan for tax reform, he is very careful to say two things: He wants to cut tax rates, and he wants high-income households to pay the same share of taxes they do today. He said it again on Face the Nation last Sunday—a rare in-depth broadcast interview on a network not named Fox.
The first promise is easy to understand. But the second is more subtle. Romney is saying the rich should pay the same share of total tax revenue as they do now. But he is not saying they should pay the same effective tax rate they pay today or that he’d exempt them from his rate cuts. Quite the opposite: His tax plan would make the 2001/2003 tax cuts permanent and further reduce rates, including for those at the top, by an additional 20 percent (bringing the top rate down to 28 percent).
While Romney says he’d offset those additional rate cuts by scaling back deductions and other preferences for high-income households, he has not said how. Thus, based on what we know, his tax proposal implies that high-income households would pay much less tax than today.
This is what he said on Face the Nation: “One– one of the absolute requirements of any tax reform that I have in mind is that people who are at the high end, whether you call them the one percent or two percent or half a percent, that people at the high end will still pay the same share of the tax burden they’re paying now.”
In other words, if you put both pieces of Romney’s tax platform together, he could cut taxes across-the-board, including for the rich, while not reducing the current tax share paid by those at the very top of the economic food chain.
To make this more understandable, let’s look at a few numbers produced by my colleagues at the Tax Policy Center:
Last year, the top 1 percent (those making an average of about $1.5 million) paid one-quarter of all federal taxes. The top 0.1 percent, who made an average of nearly $7 million, paid about 13 percent of all federal taxes. It is that share of federal tax payments that Romney would freeze.
That’s very different from freezing their average tax rates. For instance, last year the top 1 percent paid an average rate of 29.7 percent while the top 0.1 percent paid an average rate of 31.6 percent. Romney is not at all opposed to lowering those effective rates.
Indeed, if Romney does cut statutory rates across-the-board, the richest households would get the biggest tax reductions, in both dollars and as a share of their income. For instance, TPC estimates that without any offsetting reductions in tax preferences, Romney would cut taxes for those in the top 0.1 percent by more than $1 million, while he’d cut them for middle-income households by about $2,000.
The GOP’s likely standard-bearer was fuzzy in his Face the Nation interview about who would be subject to the Romney Rule on tax shares. That could matter quite a lot when he decides how to reduce those tax preferences for high-income households.
The world of the top 0.1 percent is vastly different from those in the top 5 percent, where households make $210,000 and up. Romney could, for example, freeze the tax share of the 120,000 households in the top 0.1 percent while reducing it for the nearly 6 million in the top 5 percent. And that implies that he’d raise the tax shares paid by lower income families.
Many politicians are sloppy when they talk about taxes. But when he wants to be, Romney is quite precise. As a result, his promises often hinge on technical but very important distinctions. That’s why when Romney speaks, you should listen very carefully.
In this April 12, 2011, file photo, Medicare Administrator Donald Berwick gestures during an interview with The Associated Press in Washington. Many Americans may believe that Medicare is financed like Social Security. But this is just not true. (J. David Ake/AP)
Payroll taxes cover about a third of Medicare costs
I get the impression that many Americans believe Medicare is financed like Social Security. They know that a portion of payroll taxes goes to Social Security and a portion goes to Medicare. So they conclude workers are paying for Medicare benefits the same way they are paying for Social Security benefits.
That isn’t remotely true, as new data from the Congressional Budget Office demonstrate.
In 2010, payroll taxes covered a little more than a third of Medicare’s costs. Beneficiary premiums (and some other earmarked receipts) covered about a seventh. General revenues (which include borrowing) covered the remainder, slightly more than half of total Medicare costs.
If you prefer to focus on just the government’s share of Medicare (i.e., after premiums and similar payments by or on behalf of beneficiaries), then payroll taxes covered about 40% of the program, and other revenues and borrowing covered about 60%.
In contrast, payroll taxes and other earmarked taxes covered more than 93% of Social Security's costs in 2010, and that was after many years of surpluses.
The difference between the two programs exists because payroll taxes finance almost all of Social Security, but only one part of Medicare, the Part A program for hospital insurance. Parts B and D (doctors and prescription drugs) don’t get payroll revenues; instead, they are covered by premiums and general revenues. But that distinction often gets lost in public discussion of Medicare financing.
As recently at 2000, general revenues covered only a quarter of Medicare’s costs. That share has increased because of the creation of the prescription drug benefit in 2003 and because population aging and rising health care costs have pushed Medicare spending up faster than worker wages. Over the next decade, CBO projects that premiums will cover a somewhat larger share of overall costs, while the general revenue share will slightly decline.
Note: For simplicity, I have focused on the annual flow of taxes and benefits. The same insight applies if you want to think of Social Security and Medicare as programs in which workers pay payroll taxes to earn future benefits. That’s approximately true for workers as a whole in Social Security (but with notable differences across individuals and age cohorts and uncertainty about what the future will bring). But it’s not true at all for Medicare.
Republican presidential candidate Mitt Romney gestures during a campaign stop in Cincinnati, Ohio, Thursday, June 14, 2012. Both Mitt Romney and President Obama have now aid out their visions for economic policy. Sadly, while both included plenty of criticism of the other guy, neither told us very much about how they’d actually govern. (Evan Vucci/AP)
Talking heads: Candidates have big speeches, little vision
Yesterday, Mitt Romney laid out what his campaign said was his vision for health reform. Today, he followed that up with a talk on economic policy. And President Obama delivered a speech that his campaign promoted as a framework for economic policy. Sadly, while men both included plenty of criticism of the other guy, neither told us very much about how they’d actually govern.
First Romney: The former Massachusetts governor has this problem. He must find a way to convince voters that he has an entirely different idea for health reform than Obama who, of course, lifted his own version from none other than Romney.
So in an effort to put something new on the table, Romney proposed…well, he didn’t really propose anything at all. He recited a carefully-parsed version of the usual GOP talking points: Block grant Medicaid (a polite way of saying he’d cut the federal share of that program), make it harder for patients to collect damages for malpractice, and expand tax-advantaged Health Savings Accounts. He’d also create health exchanges that would somehow be different than the exchanges in the Affordable Care Act. Finally, Romney promised to “end tax discrimination against the individual purchase of insurance.”
That last idea is intriguing, but what does it mean?
In 2008, GOP presidential nominee John McCain proposed a bold plan to replace the tax exclusion for employer-sponsored health insurance with a refundable tax credit for individuals. The idea, which has broad support among economists and the backing of a few brave politicians, was sharply criticized by candidate Obama as a big tax hike.
So Romney, as is his wont, only talks about the easy part—boosting those tax subsidies to help individuals buy insurance. He says not a word about what he’d do about the current exclusion. Would he end tax discrimination by subsiding both individual buyers and those who get their insurance from their employer? Doing both would add tens of billions to the deficit. So how would he balance the budget too?
Now to Obama, who has had a rough couple of weeks: He doesn’t seem to know what to do about Romney, who is running the same kind of change campaign that Obama ran against the Washington establishment in 2008—a gauzy criticism of the status quo unencumbered by a real agenda. And the president–a master of that soaring change rhetoric– seems much less comfortable playing defense.
So, to reframe the debate, Obama today delivered what was billed as a major economic speech. But, like Romney’s health talk, it was largely devoid of serious new ideas. Instead, the president seems to be running on a recycled version of last year’s stimulus proposal and echoes of his past budgets. You know the drill–subsidies for alternative energy, education, and basic research, modest new infrastructure spending, and tax cuts on firms that hire in the U.S. These ideas are not only old, they are small….
Obama says he is serious about fixing the deficit, but says only he’d raise taxes on companies that hire overseas and those individuals making $200,000 (couples making $250,000). No word on where his spending cuts would come from.
It is surely true that Obama and Romney have very different views about the role of government and the nation’s future. But neither man is telling the full story of how he’d fulfill his respective vision. We know where they want to go, but not how they’d get there.
Long ago, President George H.W. Bush was roundly criticized for lacking what he allegedly called “the vision thing.” Today, in the race between management consultant Romney and the ever-cautious Obama, we may again be watching a campaign with a large sinkhole where that policy vision is supposed to be.
Senate Finance Committee Chairman Sen. Max Baucus, D-Mont. speaks during a meeting on Capitol Hill in Washington in this February 2012 file photo. The Baucus tax reform plan is very different from the Republican's offering, as articulated by House Ways & Means Committee Chairman Dave Camp (R-MI). (J. Scott Applewhite/AP)
The great tax debate: Dueling Congressional tax proposals clash
Yesterday, Senate Finance Committee Chairman Max Baucus (D-MT), who rarely gives public speeches, laid out his agenda for tax reform. Just for fun, I compared what Baucus told the Bipartisan Policy Center to a speech House Ways & Means Committee Chairman Dave Camp (R-MI) delivered just three weeks ago to a group of Washington lobbyists.
For optimists, there were some points of agreement. For example, both chairmen focused on the importance of a tax code that encourages economic growth and international competitiveness. Both said it is important for Congress to take a hard look at the individual merits of each of the scores of expiring tax preferences rather than mindlessly extending them as a group–as Congress always does.
But after that, the gulf between the two men is simply stunning. Baucus said flatly that any tax reform has to generate more money. “Deficits and debt are not just a spending problem,” he said, “We simply don’t raise enough revenue.”
Camp is in a far different place: “I can firmly say our goal is: One, block massive, job-killing tax increases; and, two—enact…comprehensive tax reform.”
Of course, one can try to parse Camp’s words and conclude that perhaps he’d support smaller, non-job killing tax increases (whatever they are). Or, perhaps, broadening the tax base is, in his fiscal theology, not a tax increase at all. But even this sort of close Talmudic reading still leaves a revenue chasm between Baucus and Camp. And keep in mind that the two chairmen are far more likely to seek accommodation across the aisle than many in their respective caucuses.
Revenue is not the only place where the two men differ. Camp and the House GOP caucus have set a very specific set of goals for a revised tax code: Set two individual rates of 10 percent and 25 percent; eliminate the Alternative Minimum Tax; and move the corporate tax to a territorial system, where the US would tax income generated only in the U.S.
For Baucus, this thinking is exactly backward. In his view, issues such as rates and structure should take a back seat to a broader, macro-economic aim: “We should think about what’s the real reason for tax reform. Why are we doing this?”
To that end, Baucus wants a tax code that reflects changes in both economics and demographics. So, for instance, he wants a revenue code that recognizes the rise of services and technology, and one that addresses the needs of single-parent households.
Camp may be thinking of these issues as well, but his main focus is those low rates.
Finally, there is the matter of short-term tactics. Camp and the House Republicans want a vote this summer on extending all of the 2001/2003 tax cuts. Most Senate Democrats, for their part, want a vote this summer on extending those tax cuts for all but the highest income households. But the always-cautious Baucus does not. He wants to avoid divisive partisan votes before the election.
It is, of course, dangerous to take the public words of politicians too literally. And when given a choice between listening to what they say or watching what they do, it is always preferable to do the latter. But Camp and Baucus are serious guys in important positions. It never hurts to pay attention to what they have to say.
Former President Bill Clinton speaks at the second annual Clinton Global Initiative America, Thursday, June 7, 2012, in Chicago. Clinton has suggested that Obama should table the debate over the Bush tax cuts yet again, until early 2013, but Gleckman argues that doing so would have dire economic consequences. (Spencer Green/AP/File)
Should we delay the tax cut debate until 2013?
Over the past week or so, Bill Clinton, Larry Summers, and Glenn Hubbard have all made the same suggestion: Congress should extend all of the 2001/2003 tax cuts, due to expire at year’s end, into early next year.
It seems like an awful idea.
I suspect they have different motivations for this advice. Clinton, ever the master political strategist, may have done a calculation about President Obama’s re-election: Uncertainty over Taxmageddon is dampening the animal spirits that drive economic growth. And it is that growth, or its absence, that will largely decide whether Obama will remain in the White House after January.
Thus, Clinton’s public intervention may be intended to convince the president to take that uncertainty off the table now by urging Congress to extend the tax cuts into 2013.
A 3-month delay doesn’t change fiscal reality in any way, but Clinton may be hoping it improves perceptions by getting the end-of-year train wreck out of the headlines. Out of sight, as they say….
Summers, who was a top economic adviser to both Clinton and Obama, may simply be worried about what appears to be another slowdown. “We’ve got to make sure we don’t take gasoline out of the tank at the end of this year,” he said on CNBC’s June 6 Morning Joe program.
His fears echo that of Fed Chairman Ben Bernanke and three Federal Reserve Governors, who in recent days all expressed concern that the economy is again sputtering.
Hubbard, a senior economic adviser to President George W. Bush and Mitt Romney, may have something else in mind entirely. He told the Wall Street Journal on May 29 that he’d like to see the tax cuts extended into early next year as well. That would give Romney the flexibility he needs to enact his own substantial tax reduction.
If Congress votes this year to make permanent all the Bush-era tax cuts—except for those for high-income households– a newly-elected President Romney would have much less maneuvering room. The official deficit would look a lot bigger than it does today and Senate Democrats would have plenty of leverage to block Romney’s tax initiatives.
Since it is likely that the debt limit won’t be reached until sometime in the first quarter of next year, Democrats would be happy to force Romney to tie tax cuts for the rich to a painful vote to increase the U.S. borrowing authority.
Of course, while Clinton, Summers, and Hubbard (it only sounds like a white shoes law firm) want to kick the tax debate into next year, they disagree on what to do after that. Clinton and Summers want the tax cuts on those high earners to expire at some point. Hubbard, or at least Romney, would not only continue them, but expand them. And cut taxes for most everyone else as well.
Obama, for his part, insists he is sticking by his guns. He wants Congress to make permanent the 2001/2003 tax cuts for those making less than $200,000 (or couples making less than $250,000) but insists that lawmakers allow them to expire for the highest income households. Of course, Obama said the same thing in 2010 and eventually blinked, agreeing to continue them all until the end of this year.
While both Obama and Romney partisans think there are good political reasons to put off the inevitable until early next year, in the real world a short-term extension of those tax cuts seems like a terrible idea. I can’t think of much worse tax policy than extending virtually the entire Revenue Code for a few months at a time.
Chris Edwards (left), director of tax policy studies at the Cato Institute, and former Florida Governor Jeb Bush confer before testifying at a House Budget Committee hearing on "Removing the Barriers to Free Enterprise and Economic Growth" in Washington June 1, 2012. Everyone, it seems, has a different idea for how to fix the tax code. Our tax experts weigh in. (Kevin Lamarque/Reuters)
A better way? The case for a new kind of tax reform
The Congressional Budget Office’s latest update, released today, provides a snapshot of fiscal policy in the short run, the medium term, and the long run. CBO disclosed its short-term analysis in May: If automatic spending cuts and tax increases kick in as scheduled at the end of the year, the U.S. could be thrown back into recession. Meanwhile, few quibble that in the long run, demographics and the continued rapid growth in medical costs will require spending that exceeds the capacity of our current tax system.
CBO’s midterm projection, however, is more controversial. The agency warns that over the next decade, continuing temporary tax policies – in particular the 2001/03 personal income tax cuts – will lead to unsustainable levels of annual deficits and debt.
But there is nothing inevitable about this excessively glum estimate. There is a far better alternative.
What if Congress retained the level of taxation set by current law, but collected the money in a much smarter way?
Of course, Congress could just do nothing. Allowing temporary tax policies to expire as scheduled would result in small and manageable federal deficits over the next ten years. However, many aspects of tax policy implied by “current law” are problematic—most notably, the Alternative Minimum Tax would hit an additional 50 million middle and upper-middle class households by 2022.
There is a better way. In an article published yesterday in Tax Notes, Ed Kleinbard, former Chief of Staff of the Joint Committee on Taxation, and I present an alternative post-2012 personal income tax regime, the “Better Base Case”. Quite simply, the Better Base Case would raise the same level of revenue as the CBO’s current-law baseline, but in a way that addresses the most troubling aspects of reverting to the tax laws in place in 2000. Specifically, we would let the temporary tax cuts expire as scheduled under current law and then make the following changes:
- Limit the value of personal itemized deductions to 15 percent
- Permanently patch the alternative minimum tax (AMT)
- Retain the child tax credit at its 2012 level
- Tax qualified dividends at the same 20 percent maximum tax rate that applies to long-term capital gains
- Restore the estate tax to its 2009 form ($3.5M indexed exemption and a 45% rate)
The resulting tax system is more efficient, more equitable, and (most importantly) meets the most basic requirement of a tax system—it raises the revenue required to fund the spending needs of the federal government. If nothing else, it provides a useful benchmark against which to measure other competing tax proposals.
We recognize that the level of revenue implied by the CBO baseline is uncomfortable for many to accept. Indeed, it is more than President Obama has proposed in his annual budgets. But we argue that it represents a minimum level of revenue necessary over the next decade to meet our current spending needs. And despite hyperbolic claims to the contrary, it would not significantly impact people’s work effort, or the pace of economic growth and job creation going forward.
We also acknowledge that an abrupt transition to this new regime would be inappropriate in a still weak economy. The Better Base Case is fully compatible with policies that would provide additional temporary fiscal support, either by phasing in tax increases or pairing them with other more stimulative tax and spending changes.
None of this is to say we oppose additional and more ambitious efforts to reform the tax system. However, those discussions, along with more fundamental debates about the role and size of government, should take place in a stable and rational fiscal context. That is what the Better Base Case achieves.
In this August 2011 file photo, Sen. Orrin Hatch, left, moderator Douglas Holtz-Eakin, middle, and Rep. Dave Camp discuss tax and entitlement reform during a forum held at Utah Valley University. (Mark Johnston/The Daily Herald/AP)
Is the GOP tax reform strategy a fiscal trap?
I recently blogged on Doug Holtz-Eakin’s four-step framework for tax reform. His roadmap—first agree on a progressive tax code, a top rate, and the total amount of revenue to be raised, then cut the tax preferences necessary to accomplish the first three—has generated lots of interest.
But Chuck Marr over at the Center on Budget and Policy Priorities is no fan.
In his own blog, Chuck argues that the Holtz-Eakin model is a fiscal trap that would increase both deficits and income inequality. Thus, he presents his own alternative four-step plan:
1. Let the Bush tax cuts aimed at households making over $250,000 expire on schedule.
2. Agree on how much additional revenue to raise, alongside significant spending cuts, as part of a balanced deficit-reduction package.
3. Agree on specific revenue-raisers while maintaining or improving tax progressivity.
4. Reduce tax rates below their scheduled current law levels only if Congress can cut enough tax preferences to meet the revenue target without gimmicks.
The differences between the two models are subtle but very important. Let’s look at a couple:
Doug, a former director of the Congressional Budget Office and top economic policy adviser to President George W. Bush and the 2008 McCain for President campaign, wants to fix revenues as a share of Gross Domestic Product. Thus, Congress would agree that the new revenue code would raise X percent of GDP in taxes without regard to what revenues would otherwise be under some baseline.
By contrast, Chuck wants Congress to agree on how much additional revenue to raise relative to current law.
Mathematically, you can end up in the same place, but journeys are very different. Chuck would continue the argument we’ve been having since 2001, and it is a debate that has gotten us absolutely nowhere. First there is the hopelessly unproductive squabble over baselines—additional revenue relative to what? That could be resolved if later this year President Obama convinces Congress to permanently extend most of the 2001/2003/2010 tax cuts. But that’s a massive if.
Chuck’s strategy forces Republicans to swallow an in-your-face tax hike—something they are simply not going to do. They are no more likely to accept this than Democrats would agree to a Social Security reform that is presented as a cut in benefits. Framing matters.
The second big difference is the order in which they’d move toward reform. Doug would first fix a revenue target and the top rate, then scale back tax preferences to meet those twin targets. Chuck would first broaden the tax base. Congress would cut rates only after it agrees to the tax hikes it needs to meet its revenue increase target.
Chuck’s fear is that Congress would blink when confronted with painful base-broadening and that the revenue target, not the lower rates, would inevitably give way.
Joe Minarik, a veteran of the 1986 tax reform process who is now at the Committee for Economic Development, is generally supportive of Doug’s formulation, but in his own blog he agrees with Chuck that it makes more sense to get the tax base right and then fix the rates.
As a matter of pure tax policy, I agree with Chuck and Joe. Ideally, Congress should build the best possible tax base and then adjust the rates to meet an agreed-upon revenue target. But I think they misread the psychology of today’s policymakers.
Look at recent history. For decades, policy wonks have urged Congress to eliminate popular tax breaks to help meet a goal of deficit reduction. Lawmakers have responded by repeatedly adding tax subsidies and increasing the deficit.
This is not working. Perhaps lawmakers would do a better job of dumping tax preferences if their goal mixed the sweet of rate cuts with the bitter of deficit reduction.
Sure, Chuck may be right that all this is a Republican Trojan Horse—a clever strategy to lower rates and increase deficits and inequality. Mitt Romney’s tax reform (at least that part he is willing to describe) would do just that and is not, as they say, a confidence-builder.
Still, Doug’s roadmap has the benefit of reframing what has so far been an entirely non-productive debate. Will it work? As I said in my original post, probably not. But it has a chance. Merely repeating the arguments of the past decades does not.
In this March 2010 file photo, Rep. Dave Camp, R-Mich. gestures during a news conference on Capitol Hill. Camp, chairman of the House Ways and Means Committee, has said he prefers an aggressive rate cut off the bat, while others, including President Obama, have advocated for more incremental reforms. (Pablo Martinez Monsivais/AP/File)
Tax reform: The cases for going long-term, versus going prudent
Make no mistake, any attempt at tax reform will be a heavy lift. But an interesting behind-the-scenes debate is brewing among reformers over just how high to aim. And some Republicans insist that big, broad-based reform would be easier to accomplish than a more modest rewrite of the Revenue Code.
The go-long theory, favored by House Ways & Means Committee Chairman Dave Camp (R-MI) and others, works like this: The way to break the logjam over reform is to propose an aggressive, attention-getting, block-buster rate cut. And you finance this ambitious goal by going after everybody’s tax preferences, not picking and choosing among the oxen to be gored.
Such a strategy serves two purposes, they say. First, a big rate reduction—say, bringing the top corporate and individual rates down to 25 percent from today’s 35 percent—would generate the sort of popular enthusiasm that a more modest effort cannot. Who, the Camp camp asks, is going to get excited about knocking the top rates down from 35 percent to, say, 32 percent? It’s a yawner, they argue.
The second benefit to this strategy, supporters say, is that it forces all special interests to take a haircut on their existing tax preferences. There will still be winners and losers, for sure, but because nobody would avoid losing some targeted tax breaks, it would be tougher for lobbyists to protect their clients.
This model is much like the 1986 tax reform, which from its very beginnings was an attempt to knock individual rates down significantly (Ronald Reagan’s original reform would have cut the top rate, for example, from 50 percent to 35 percent). And it is similar to the strategy of the fiscal commission chaired by Erskine Bowles and Alan Simpson, which proposed taking the top rate down to 28 percent.
Of course, the go-prudent camp has different view: It is naïve, at best, to think that a full rewrite of the Revenue Code is possible in the current political environment. It would, they say, be something of a miracle if Congress can agree to any reform at all, much less mega-reform.
This view says take reform one step at a time. President Obama, for instance, has said that Congress should tackle corporate reform first. The more controversial individual provisions could be addressed later.
The cynics in the cautious camp have yet another argument. They say the go-long strategy is nothing more than justification for locking in big rate cuts that are both inappropriate and unsustainable in the current fiscal environment.
And, of course, there is perhaps the most likely option of all: Go home. As they have for decades now, policymakers will talk about tax reform even as they add more targeted tax breaks to the code.
But let’s pretend Congress will enact some reform in 2013. What will it do? Today’s politics is so different from 1986 that I’m not sure how many lessons of that experience apply. And while I’d certainly like to believe that big, broad-based reform is doable, my head tells me it probably is not.
What do you think: Should tax reformers go long, or go prudent?
Tina Dumaguing gets help from her son, Craig, as she applies for food stamps at a kiosk inside the Merced County Community Action Agency in Merced, Calif. in this May 2012 file photo. The Urban Institute's new interactive calculator helps families navigate the complicated tax and benefits systems of states across the country. (Tracie Cone/AP)
New online tool to help families maximize tax, transfer benefits
State taxes and transfers can be an important form of assistance for low-income families. But the amount of government help varies widely among the states. And, importantly, so does what happens to those benefits when such a family increases its wages.
To help understand how those tax and spending programs work, the Urban Institute has created a new interactive Net Income Change Calculator (NICC). The calculator allows users to enter information about family and work characteristics, child care expenses, rent, and program participation. The calculator then provides estimates for taxes and transfers at five income levels so users can see how taxes and transfers change as income rises.
It includes state and federal income taxes, the employee share of payroll taxes, and a wide range of subsidy programs, including Temporary Assistance for Needy Families (TANF), the Supplemental Nutrition Assistance Program (SNAP, formerly Food Stamps), the Supplemental Nutrition Program for Women, Infants, and Children (WIC) as well as subsidies for Housing and Child Care. All rules represent 2008 law.
The calculator shows how different these benefits are, depending on where a low-income family lives. For example, in 2008, a single parent with two children aged 0 and 3 with poverty level wages could have received transfer benefits ranging anywhere between $4,000 in several states and $9,200 (Connecticut) if she participated in TANF, SNAP, and WIC.
In addition, she could have received about $6,700 in federal tax credits and either owed state income taxes or received additional tax credits. For example, in Alabama her state tax bill would be over $300 while in Connecticut she would owe no states taxes. She would also have owed almost $1,300 in the employee side of payroll taxes. We assume her childcare costs, before subsidies, would increase to about $250 per month – some of which could be offset by childcare subsidies. Together, taxes and transfers could have changed this mom’s income from $17,000 in wages to between $27,500 and $32,000 in income and benefits, depending on where she lived.
What happens if that mom gets a job?
A single parent in Connecticut with two young children could have received over $18,000 in transfer benefits if she had no earnings and no income, assuming her pre-subsidy rent was $600 per month. But suppose her earnings increased to $17,000 (poverty level) – spread evenly throughout the year – increases in childcare costs (assumed to be $250 per month before subsidies) and payroll taxes would have reduced her earnings by almost $2,000. Income tax credits and transfer benefits would have then added $16,500 – for a total net income of almost $33,000. If her income increased to twice poverty, she’d have to pay almost $5,600 in subsidized child care costs, state income taxes and payroll taxes. She’d receive about $6,400 in tax and transfer benefits – for a net income of $35,000. Thus, doubling her wages from $17,000 to $34,000 resulted in a net change in income of only about $2,000.
In contrast, the same family in Alabama could have received almost $17,000 in transfer benefits if the parent had no earnings. If her earnings increased to poverty-level, she would have spent over $2,500 on childcare, state income taxes, and payroll taxes, while transfer benefits and tax credits would have decreased to under $15,000. In total, the family’s net income would rise from almost $17,000 to $29,000. If her wages doubled, the combination of declining transfers, increased taxes, and higher childcare costs would have resulted in a total net income of $33,000 – an increase of about $4,000.
The NICC provides a powerful tool to understand both how states differ with respect to taxes and transfers, and to understand how a family’s income changes as a parent increases her earnings. Try it out.
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