Like it or not, health care and taxes are inextricably linked in the U.S. The employer sponsored health system that covers most of the non-elderly is largely built on nearly $200 billion in income tax breaks. The biggest: employer-sponsored insurance which is tax-free to workers. Perversely, this structure provides the biggest tax breaks to the highest income workers who get the most expensive plans.  

 

Nearly all economists agree that this is terrible tax policy and many are looking for ways to fix it. Some want to drop the exclusion completely and use tax incentives to encourage the purchase of individual insurance. Some want to cap it for plans worth, say, $12,000 or more. Others want to turn the current deduction into a credit, which would benefit lower-income workers. Still others would take the money from tax breaks that now go to employer coverage and use it to help fund universal or near-universal insurance similar to plans proposed by Hillary Clinton and Barack Obama.

 

Others, such as Ezekial Emanuel and Victor Fuchs, have an even more ambitious idea. They’d create a European-style Value Added Tax and use the huge slug of new revenue for health care vouchers, which people would use to help buy insurance.

 

My TPC colleague Len Burman, who comes at the problem from the perspective of tax reform as well as health care reform, would go yet another step. He’d create a VAT of about 15 percent to fund these health vouchers. But Burman would also use the VAT revenue to reform and simplify the income tax.

 

He’d set two individual rates--say, 15 percent and 25 percent—and eliminate the personal exemption, the standard deduction, and most itemized deductions. He’d also dump the exclusion for employer-sponsored health insurance and vastly simplify retirement savings incentives.

 

Burman’s VAT would not only help pay for private insurance, it would also finance Medicaid, veterans health, and the share of Medicare that is now supported through general revenues (about $200 billion in 2009). 

 

Burman is hardly the first policy maven to push the VAT. Yale professor Michael Graetz  backs one of roughly 10 percent to 14 percent. However, Graetz would use the VAT revenue to eliminate the income tax for nearly all taxpayers--those earning less than, say $100,000.  The TPC’s Bill Gale has also suggested a VAT, but as an additional source of revenue rather than as a replacement for the income tax.

 

Right now, with a new Administration just eight months from taking office, policy experts are putting a huge amount of energy into both health and tax reform. The expiration of the Bush tax cuts and the ongoing Alternative Minimum Tax mess will surely drive big tax changes in 2009 or 2010. Health reform is also on the table, although short-term odds for reform may be longer. The question is: How will these two mega-issues fit together?

Yesterday, John McCain disclosed details of his plan to cut the use of fossil fuels—and thus greenhouse gases--through a cap and trade system of mandatory emissions reductions. As we have written, cap’n trade is not the name of a cheesy seafood restaurant. It is Washington-speak for a huge new tax on oil, gas, and coal. This is a good thing, but we ought to talk about it honestly.

Barack Obama and Hillary Clinton have also embraced a cap and trade system—although one that is quite different in key details from McCain’s.Thanks to Kevin Drum at Washington Monthly for noting that both Obama and Clinton have endorsed an auction of these limited rights to pollute. McCain also backs an auction, but only after a transition in which some share of the credits is given away to businesses. The differences between an auction and an allocation may numb the mind, but they are critical. In an auction, the government gets a multi-billion dollar windfall. If the credits are given away, the windfall goes to businesses. Either way, consumers will pay lots more. Another way to cut consumption of fossil fuels is a straightforward carbon tax.

McCain would have a quasi-government entity called the Climate Change Credit Corp. design the details of his system—long after the election. His goal is to slash 1990 emissions by 60% by 2050. Clinton and Obama’s target is 80%.

McCain’s plan seems to have satisfied no one. Conservatives hammer it as a huge energy tax. Which, of course, it is. The left, predictably, does not think it goes far enough. I think they have lost perspective, however. That a conservative Republican like McCain is talking about mandating 60% cuts in greenhouses gasses is an indication of just how far the discussion has come over the past few years. Environmentalist David Roberts takes the better-than-expected view More to the point, Doug Holtz-Eakin, McCain’s top policy adviser,told me in April that climate change will be a top first-year priority for a President McCain—hardly what I expected to hear.

Next month the Senate is supposed to debate a cap and trade proposal offered by John Warner (R-Va.) and McCain buddy Joe Lieberman (I-Conn). The bill has no chance of becoming law this year, but it will be the first opportunity for a high-profile Capitol Hill debate on what could be a profound change in both environmental and tax policy. It will be interesting to hear what senators McCain, Obama, and Clinton have to say.

$451 million in tax breaks for timber companies. Ka-ching. $500 million for biodiesel. Ka-ching. $126 million for racehorse breeders. Ka-ching. $20 million for Aggie bonds. Ka-ching.

It is farm bill time, so grab your wallet. When it comes to agricultural subsidies, there are no deficit hawks. There are only farm-state lawmakers, for whom no subsidy is too great, and big city pols, who can only watch in envy.

It looks as if House and Senate conferees have agreed to a $300 billion, five-year bill which leaves no special interest unturned. Although final details are still unclear, the measure will pass next week with the overwhelming support of both Democrats and Republicans. No nasty partisanship here. And the White House is beginning to make noises that the President will let the bill become law, even though Bush has, rightly, threatened to veto it in the past.

Backers say the bill is fiscally responsible. They point to a small future cut in ethanol tax credits from 51 cents to 45 cents. Sounds good, although I have a funny feeling the credit won’t ever be reduced. Reductions in out-year tax cuts never seem to happen. Instead, they become yet another tax extender.

The other alleged nod to fiscal responsibility is an agreement to eliminate some subsidy payments to farmers who make more than $750,000, or $1.5 million per couple. Bush tried to cap the payments for those earning $200,000 or more. But that was a long time ago. I’ll let you decide whether this particular glass is half-empty or half-full.

And never fear, there are plenty of winners. It appears that just one company, timber giant Weyerhaeuser, stands to gain $100 million a year in tax breaks. While Congress may trim subsidies for ethanol, it would add $537 million in tax breaks for biodiesel and renewable diesel And, having learned nothing from the ethanol debacle, it would create a “temporary” credit of $1.01 per gallon for biofuels made from farm waste, switch grass and the like. Another tax extender in the making.

Fiscal conservatives just roll their eyes at these bills. It is a good year if they can just limit the damage.

Before you get the idea that a big increase in energy taxes is just the latest raving of an elitist, inside-the-Beltway policy wonk, you might want to know that I’m not the only one who likes this idea. So do John McCain, Hillary Clinton, and Barack Obama.

Yup, its true. McCain and Clinton would cut the gas tax before they’d raise it.Obama is, at least, more consistent. He’d raise energy taxes, through a windfall profits tax on oil companies, before he’d raise them some more.

All three candidates have endorsed what has become known as a “cap and trade” energy policy. Now, Cap’n Trade may sound like the name of a second-rate seafood restaurant. But it is really just Washington-speak for “really big energy tax increase.”

Cap’n Trade would work like this. The government would require companies to obtain permits that give them the right to emit a fixed amount of greenhouse gasses. The limit on emissions (the cap) would be gradually ratcheted down over the years until the overall amount of schmutz reached some agreed-upon level. A relatively clean company could sell (trade) its unused rights to pollute to a dirtier company.

Theere are basically two versions. The government could auction those mandatory licenses, a process which would look an awful lot like a tax. CBO figures that government revenues from these mandatory emissions permits would range between $50 billion and $300 billion annually. That money would not come from thin air (clean or not). It would be paid by consumers in the form of higher prices.

Or, Washington could give the permits away based on prior energy use, which would generate a massive corporate windfall. But the impact on consumers would be the same: The mandated reduction in supplies of fossil fuel would drive up prices, which would be passed through in the form of higher costs for gasoline, home heating oil and anything else made from oil, coal, or natural gas. The only difference is energy producers would get to keep the money.

Obama and Clinton like the auction. McCain has not said which version he favors.

Now, don’t get me wrong. Raising taxes on energy is the surest way to reduce demand, which in the long run may make for both a cleaner environment and lower energy prices. We can argue about whether Cap’n Trade or a direct carbon tax is a better idea, but that is for another day.

The point is that McCain, Clinton, and Obama all favor big hikes in the prices consumers pay for fossil fuels, including gasoline. Since these increases would dwarf the gas tax dollars they have been arguing about for the past couple of weeks, it might not be a bad idea if we started to pay more attention to the ol’ cap’n than to the pros and cons of a temporary gas tax holiday.

Senator Clinton has taken economists to task for our universal opposition to a gas tax holiday. Both theory and evidence tell us that suspending the tax temporarily would provide little relief to consumers while further enriching big oil.

Mrs. Clinton says that, if the government did it right, it could guarantee that the tax cut was passed on to consumers.

She’s right. There are two ways that the government might guarantee that the tax holiday translated into lower prices.

One idea is price controls—mandate that pump prices fall by the amount of the tax (or even more!). We tried that in 1973 and 1979 and it kept prices low. The only problem was—there were shortages. Clinton is old enough to remember long lines at gas stations and service stations closed because they’d run out of fuel.

More recently, Saddam Hussein’s gas price controls remained in place after we ousted him from power and gasoline supplies were disrupted. The Iraqis were so frustrated by long gas queues that there were sometimes tragic consequences when impatient motorists tried to jump the lines.

If Senator Clinton does not want to channel Richard Nixon, Jimmy Carter, or Saddam Hussein, she could try FDR. During World War II, his administration issued ration coupons to allocate scarce goods while keeping prices under control. It mostly worked, though we had a flourishing black market for many goods. Patriotic fervor for the war effort kept the black market somewhat in check.

However, with opposition to the Iraq war running high, and an ethos that sacrifice is required only of our troops and their families, I’m thinking ration coupons would be less successful now. It would also be really, really hard to implement a ration program or price controls by Memorial Day—even harder than that gas tax holiday.

Economics is called the dismal science for good reason. Sometimes the market creates unpleasant outcomes—like $4.00 gas prices—and we can’t wish or bully-pulpit those results away.

The good news is that market responses to high gas prices—like switching to fuel efficient cars and using alternative modes of transportation—will bring prices down over time. If we let them…

With unusual speed, the IRS sent out the first tranche of $100 billion in recovery rebates last Monday. It took Congress and the President less than a month to enact the Economic Stimulus Act of 2008 and then just 62 days for the IRS to begin getting the money into people's hands. The question now is what will they do with the windfall, which for couples will be as much as $1,200 plus $300 per child. The answer may disappoint those who are hoping a new burst of consumer spending will give the lagging economy a needed boost.
 
History and poll responses provide some guidance.  A 2003 study of the 2001 tax rebates  estimated that nearly half of recipients used their rebates to pay down debt and another third saved theirs.  Only about one-fifth of the rebates went for the immediate consumption policy makers had hoped would help boost a lagging economy.  A 2007 analysis of the 2001 rebates based on the use of credit cards found that although many recipients initially used their rebates to pay down their credit card debts, over the next nine months their total spending rose by an amount roughly equal to 40 percent of their rebates.  Rebates appear to raise consumption but much of the effect isn’t felt for many months.

What will happen now?  Consumer debt is much higher than it was seven years ago and polls show angst about the economy and the direction it’s headed.  Both of those conditions suggest that recipients will use more of their rebates to pay down debt than they did in 2001.  The most recent surveys show consumer plans that closely match spending patterns found in the 2003 study: most people plan to save or, equivalently, pay down debt. Just one in five expects to spend more.  Only time will tell, but consumer caution could well blunt the hoped-for expansionary boost to our flagging economy

While TaxVox and others have disclosed the folly of a federal tax holiday, some have suggested that temporary state gas tax relief might work better. Some New York State legislators are already pushing for such a plan. But before cash-strapped states jump on the bandwagon, they might consider how a previous experiment in Illinois and Indiana worked out. In 2000, Indiana announced that it would be suspending its 5 percent gasoline sales tax for 120 days beginning July 1. In response, Illinois also suspended its levy for six months that July.. Quaint as it seems today, the changes were spurred by a spring spike in Midwest gas prices to (gasp) $2.00 – a level drivers would now gladly embrace. 

 

According to an article by Doyle and Samphantharak published in the Journal of Public Economics,  between 60 and 70 percent of the 5% gasoline sales tax cut was passed on to consumers, while 80-100 percent of the reinstatement of the tax was passed on– albeit at a time when prices had already dropped.  (The original spike in prices was caused by temporary limits on supply.) Thus, it appears that drivers got some, but not all, of the benefits but paid for the tax reinstatement.  They also found somewhat smaller pass-through effects near the state borders. An earlier study released in 2001 by Michael Martin of the American Road and Transportation Association found that about half the tax change was passed through to consumers. .

 

What did it all mean for tax revenues at a time when, like today, states are facing budget shortfalls?  The Indiana and Illinois moratoriums were estimated to have cost the states $46 million and $157 million, respectively, while according to Martin, the average motorist saved about the cost of a half-a-tank in Indiana or a full tank in Illinois, or about $10 or $20 per motorist. Given that money was cut from infrastructure projects and eventually had to be made up from other taxes, this seems like a dubious trade-off.

 

Despite this less-then-stellar windfall for drivers, the Illinois and Indiana tax changes probably passed along more savings than a current state holiday would because the temporary nature of the supply constraints in the Midwest market at the time might not apply today either there or in other states. Any new pressure on prices caused by the increase in demand from specific state tax cuts would be spread across regional gasoline supplies, causing prices to fall in the state with the tax holiday and rise in neighboring states.  In contrast, with national refineries  running at or close to capacity,  a nationwide tax cut would not bring forth additional supplies, so state holidays are more effective at reducing gas prices within a state than a federal moratorium would be in reducing national gas prices. 

 

Bottom line: The states’ tax holiday didn’t do much more for consumers than the fed’s would. If motorists want to save money on gas, they’d be a lot better off driving less, or slowing down.

If a gas tax holiday drives the price down by the full amount of the tax (18.4 cents), the average driver would save about $28 ($27.67) between June 1 and September 1.  But we think the price would fall by only a small fraction of the 18.4 cents tax – so instead of $28, the average driver might save $5 to $10.

 

Here’s how we get the $28 figure:

 

Average annual per vehicle gas use (from AAA) = 550 gallons

 

Percent of annual miles drive in June, July, and August = 27.4.  Calculated from data in 2001 National Household Travel Survey.

 

Multiply 550 x .274 = 150.6 gallons consumed in summer months.

 

At 18.4 cents per gallon, this comes out to $27.71

 

Other Relevant Information

 

The average price of regular unleaded gasoline increased from $1.85 in 2004 to a projected $3.54 in the summer of 2008.   This price increase will cost the average consumer about $260 in the summer of 2008 (assuming no reduction in gasoline consumption), compared to what he would have paid at 2004 prices.

 

The tax rate has remained constant since 1993 at 18.4 cents per gallon.  This means the tax as a share of the price has dropped from 9.9 percent to 5.2 percent.  In comparison, average gasoline prices increased by 13.6 percent (41.5 cents) between January and April.  So even if the price falls by the full amount of the tax, it would wipe out only about 44 percent of the price increase in the last three months.

 

 

It is the fifth anniversary of President Bush’s dramatic landing on the deck of the aircraft carrier USS Abraham Lincoln where, in front of that massive “Mission Accomplished” banner, he declared “major combat operations in Iraq have ended.” They have not, of course. And it has me thinking about how those of us who do not have loved ones in combat operations are sacrificing nothing for this conflict.

 

As the war drags on, the cost is apparent: 4064 U.S. dead and more than 30,000 wounded. Roughly 150,000 troops still remain on the ground, the same number who were there the day Bush spoke. The price tag so far is in excess of $600 billion . CBO figures the total cost will exceed $1 trillion, and Nobel economist Joe Stiglitz  thinks direct and indirect costs could approach $5 trillion.

 

Amazingly, we have not paid for a dime of it. Every cent has been borrowed from our children and grandchildren. Not only is this one of the rare wars in U.S. history that has not been financed at least in part by a tax increase, it has been accompanied by massive tax cuts.

 

The Urban Institute is about to publish an instructive new book called War and Taxes.  In it, authors Joe Thorndike, Steven A. Bank and Kirk J. Stark argue that “this contrast—between an active war effort on one hand and substantial tax cuts on the other—has no precedent in American history.”

 

The authors are careful to recount that taxation during wartime has not always been a story of heroic, John Wayne-like national sacrifice. Indeed, they remind us that these tax increases were often delayed and obscured and rarely shared equally. Still, in the end, the bill was paid.   

 

Compared to other wars, Iraq has been very cheap. Today, the entire defense budget is only about 4 percent of Gross Domestic Product. During Vietnam, military spending topped out at 9.5%. At the height of the Korean War it was 14% and in 1944,World War II absorbed nearly 40% of GDP.

 

Maybe, as Stiglitz argues, the Iraq conflict has had an impact on energy prices and the overall economy. Maybe not. But the costs are still trivial compared to past wars. Relatively low inflation makes it even easier for the White House to put the war on a credit card.

 

There is little doubt that we can afford Iraq in the conventional financial sense. Our unwillingness to pay for it through higher taxes—or, for that matter, a draft-- is not really about economics. In the end, it is a moral test. And it is one we are failing shamefully.

 

  

Much of the reaction to the April 16 Democratic Presidential debate was directed at the moderators for focusing on character and perception rather than policy. But issues got mangled as well—not only by the candidates, but by moderator Charles Gibson. While questioning Barack Obama about his proposal to raise the capital gains tax, Gibson claimed that when the rate has been cut, government took in more money, but when the tax was increased revenue fell. Although this argument warms the hearts of the Wall Street Journal editorial page, the implication that capital gains tax rate cuts raise revenues is not supported by the evidence.

The relationship between capital gains taxes and revenues has been studied extensively by economists. Although most studies find that higher rates reduce realizations of gains, that does not mean they cut revenues. It is simple math: If revenue is going to fall when capital gains rates are raised, the percentage drop in realizations must exceed the percentage increase in the tax rate. And there is little evidence that happens, especially at today’s maximum 15% rate, but even at the 28% top rate that applied after 1986.

In 1994, TPC’s Len Burman and Bill Randolph (then at Treasury, now at CBO) estimated that a 10 percent permanent increase in the capital gains rate reduces realizations by 2 percent in the long run. The real impact, they found, is in the short run. People take their gains when their tax rate is temporarily low and respond strongly in the year rates change, delaying their gains (or accelerating them) to take advantage of the lower rate.

When I was at CBO in 1988, I co-authored a paper that estimated that the government’s revenues are maximized at a rate of between 25.6 percent and 32.3 percent—far higher than today’s 15 percent maximum.

In 2000, Matthew Eichner and Todd Sinai published a paper in the National Tax Journal that updated our estimates. They found a huge response in 1986, when people sold a lot of stock in advance of a big tax increase they knew was coming in 1987. But, excluding that unusual year, Eichner and Sinai found an even smaller reaction to changes in capital gains rates than CBO had.

In addition to the direct revenue loss of lower capital gains tax rates, a large gap between rates on gains and ordinary income encourages taxpayers to convert their income to capital gains, which reduces ordinary income tax collections. The carried interest arrangement, in which partners in Wall Street hedge funds take compensation as gains instead of bonuses, is a perfect example. A higher capital gains rate would reduce this behavior. That, in turn, would raise revenue not only from higher capital gains taxes, but also from ordinary income.

In his question to Obama, Gibson also claimed that 100 million shareholders would be affected by a hike in the capital gain rate. But most of these shareholders hold assets in 401k plans, which are not subject to capital gains tax. In 2005, less than 14 million taxpayers realized taxable capital gains. And the vast majority of these gains are realized by very wealthy individuals—almost 60 percent by individuals with income over $1,000,000.

Props to Barack Obama for resisting the siren call for a summer gas tax holiday. In contrast, Hillary Clinton has clambered aboard John McCain’s free-lunch bandwagon, vowing to support the gas tax cut he first proposed a couple of weeks ago. Even worse, she’s now tied it to an energy company windfall profits tax so, as she says, oil companies would “pay their fair share to help us solve the problems at the pump.”

What she’s really done is propose the Internal Revenue Code version of a dog chasing its tail. She cuts a tax, adds another tax, and in the end everyone is back exactly where they started.

It would work like this: Clinton would cut the federal gas tax for a few months. Since refiners are already working at full capacity to produce gasoline and a gas tax cut will only boost demand, fuel prices will go up and largely offset the tax reduction. She says the Federal Trade Commission could make sure the tax cut is passed on to drivers, but I can’t imagine how that would work, short of price controls. In the end, consumers will be pretty much in the same place they started—with pump prices heading for $4.00. Refiners, on the other hand, would enjoy a windfall.

Since the gas tax is supposed to fund highway construction, the government would find itself without the money it needs to build roads. In 2006, the gas tax generated about $28 billion. A summer’s worth would be about $10 billion.

By proposing her tax on energy companies, Clinton seems to recognize the problems with the tax holiday. But her solution? It is a politically elegant stupid tax trick.

She’d take the windfall profits tax and pump it back into the highway trust fund. In other words, revenue from the new corporate tax would do nothing more than replace money from the gas tax--leaving the trust fund exactly where it started. We don’t know exactly what the windfall tax rate would be, or what companies would have to pay it. But, more or less, they’d be back where they started too. They’d raise prices at the pump, and then give their increased profits back to the government in higher taxes. None of this shell game would have any impact on pump prices.

So, in the end, Clinton would do nothing for consumers, nothing for road construction and nothing for producers and refiners. It is clever politics, of course, because it seems like she is cutting costs for cash-strapped drivers and making big bad oil companies pay. But then, when my dog chases her tail, she’s not accomplishing much either. She does seem to be having a good time, however.

There are few things more frustrating in life than being a budget hawk. You spend your days predicting dire consequences that never quite come to pass, trying to convince voters that their government can’t keep expanding popular programs without paying for them, and hectoring politicians into making votes that would be political suicide. Like Cassandra of Greek myth, you have the ability to foretell the future, but suffer the curse of being unable to change it.

Earlier this month, a group of middle-of-the-road think tankers agreed on a new way to address the unnerving prospect of rising deficits. This gang of 16 included former CBO directors Bob Reischauer, Rudy Penner, and Alice Rivlin, and former top White House aides Bill Galston and Belle Sawhill. It included Republicans such as Ron Haskins and Democrats such as Will Marshall—all members in good standing of the Washington policy establishment.

What they came up with is at least intriguing. Unable to agree on a specific plan for deficit reduction, they instead went the tactical route, proposing a process aimed at slowing the growth in Medicare, Medicaid, and Social Security. Their idea is for Congress to set sustainable long-term budgets for the Big Three entitlements and review their costs every five years or so. If the programs grow faster than the pace Congress agreed upon, automatic spending reductions or revenue increases would kick in.

Now, these battle-scarred budgeteers are hardly naïve. They fully expect Congress would never enact the automatic budget cuts. Instead, the triggers would be both a stick to prod action and a bit of political cover for politicians reluctant to act. “We have no illusions,” says former CBO director Rudy Penner, “Congress might waive the trigger.” But, he adds, “Congress would have to make its decisions explicit.”

The prospect of draconian triggers might allow Congress to approve some valuable half-measures and take credit for preventing the more serious automatic cuts. Delaying the first review until five years after the trigger law passed would also give politicians some breathing room before they had to make hard choices. This plan might not solve future budget problems, but it might at least downshift them from catastrophic to merely bad.

Congress, of course, has a long history of happily ignoring triggers and other budget rules. Remember Paygo, anyone? And after years as a budget reporter, I confess to being more than a little skeptical about process reform. But after listening to the three remaining Presidential candidates outdoing one another in the race towards fiscal irresponsibility, we desperately need a new idea or two. This is at least something to talk about while McCain, Obama, and Clinton do their best to blow the lid off the deficit.

While most observers are focused on John McCain’s proposed summer gas tax holiday, they have missed a much bigger idea from GOP’s likely presidential nominee: A massive tax reform—but one that, at least as it stands now, would be a huge windfall for business.

McCain would get to reform through profound changes in the corporate income tax. His goal is a variation on a Flat Tax called the X-Tax, which was first developed by the late Princeton economist David Bradford. The tax itself is pretty simple, but its consequences are dramatic. Businesses would be taxed on the difference between their sales and their cost of goods and services. They could also deduct their labor costs, but all financial transactions would be completely excluded from the system. That means companies could no longer deduct interest payments on money they borrow to buy equipment. In the textbook version, individuals would pay tax on their wages, but not on investment income, such as dividends or capital gains.

This is sometimes called a cash-flow tax and, unlike a true flat tax, it can be built around progressive rates. Bradford, like most smart economists, understood that the rates were the least important piece of this puzzle.

McCain isn’t going for the X-Tax right away, but he’s embraced some pretty big elements. For example, he’d allow companies to expense, or immediately write off, all their capital costs. He’d also lower the corporate rate from 30 percent to 25 percent. But, at least for now, he’d still allow businesses to deduct their interest payments. This would turn companies into massive tax shelters.

When I interviewed McCain’s chief economic adviser, Doug Holtz-Eakin, at a TPC forum earlier the month, he wasn’t shy about the ultimate goal. “It would be a step towards some of the reforms we’ve seen, particularly the Bradford X-Tax,” Holz-Eakin said. The idea would be to “capture as much of the cash flow as you can at the entity level.”

Holtz-Eakin, who is nothing if not a good economist, also readily admitted the problem. “It is a huge loophole to have expensing and interest deductions,” he said. A full-blown reform plan “would require coming to terms with it.” Yet, McCain has not yet proposed ending the deduction.

McCain may be working off a playbook written years ago by former Reagan Treasury official Ernie Christian. His plan, which he dubbed Five Easy Pieces, was a step-by-step transition to a consumption tax. McCain has embraced at least two—lower rates and expensing. Another piece would eliminate individual taxes on all investment income, but so far McCain will only say that he’d keep rates low on dividends and capital gains.

Will McCain bite the bullet on the interest deduction? Holtz-Eakin knows he must, sooner or later. But don’t look for it any time soon. After all, such a trade-off would create huge winners and losers among businesses, and that’s not something a GOP presidential candidate necessarily wants to talk about. At least not until after he’s elected.

On April 17, the Tax Policy Center posted “Scoring McCain’s Tax Proposals”. Although I remain a fan of efforts by organizations like the Tax Policy Center to analyze taxation issues, the analysis is misleading on the whole and wrong in some particulars.   more »

In their debate last night, Hillary Clinton and Barack Obama wandered deep into George H.W. Bush land by pledging never to raise taxes on “middle-income” taxpayers making less than $250,000.   more »