The Bowles-Simpson Plan: Tax Hike or a Tax Cut?
Fascinating to read the morning-after criticism of the tax provisions of the Bowles-Simpson deficit reduction plan. Many commentators on both the left and the right hate it—but for entirely contradictory reasons.
Many on the left are focusing on the across-the-board rate reductions, and they are furious that they’d benefit high-earners as well as everyone else. But they are ignoring both the provisions that would tax capital gains and dividends at ordinary income rates and, most importantly, the proposal’s overall impact: $750 billion in income tax hikes and additional increases and in the Social Security payroll tax for high-earners and ni the gas tax.
For instance, Paul Krugman, who really should know better, wrote, “If you’re sincerely worried about the US fiscal future — and there’s good reason to be — you don’t propose a plan that involves large cuts in income taxes.” Joan McCarter over at Daily Kos calls the plan “massive tax cuts for wealthy, pain for the rest of us.”
By contrast, conservatives are furious exactly because the plan hikes taxes on investment income and raises overall taxes. They are completely ignoring the benefits of eliminating targeted tax subsidies and lowering rates, having forgotten, apparently, that this was exactly the goal of Ronald Reagan’s tax reform. Here is the always predictable Americans for Tax Reform: “This commission is merely an excuse to raise net taxes on the American people. Support for the commission chair plan would be a violation of the Taxpayer Protection Pledge which over 235 Congressmen and 41 Senators have made to their constituents.”
Now, if Bowles and Simpson could just get the left to recognize that the plan is in fact a significant tax increase and convince the right that it cuts income tax rates more than at any time since Reagan, maybe they could get somewhere.
Having read this I thought it was extremely enlightening. I appreciate you taking the time and effort to put this information together. I once again find myself personally spending a significant amount of time both reading and commenting. But so what, it was still worthwhile!
Can you possibly link me to the relevant info on Bismark?
Franchise would not be limited. It would be expanded. Democracy as we know it would not change. Right now we have “vote” + “vote with your feet”. Nothing would be subtracted. We would have “vote” + “vote with your feet” + “vote with your taxes”.
Given the choice, what percentage of tax payers would vote with their taxes?
Like I said, Bismark not only suggested he, he did it during the First Reich.
Other than as a bar room exercise, however, any consideration of limiting the franchise to the wealthy is legally impossible in the United States.
Rich tax payers are generally better educated than the general population. Pragmatarianism (vote with your taxes) is all about ceteris paribus…so tax payers would only be able to say which public goods their taxes help fund.
The power and control dynamic would certainly shift though. Tax payers would help check the power of congress as well as check any possible tyranny of majority.
That is almost Bismarkian. It won't happen – ever – because we don't have a head tax. Giving rich taxpayers more of a say in spending would be a disaster for democracy. It could only lead to lower taxes on the wealthy, so it would be somewhat self-correcting, but still disasterous.
Do you know if anybody has ever seriously discussed allowing tax payers to vote with their taxes?
Limiting government to 21% of GDP is a pipe dream unless you can effectively lock it out of any involvement in healthcare finance. It is not going to happen.
The baseline should not be current policy, but current law, although current law may change if at least one Republican votes to make the middle class tax rates permanent.
The zero benefits proposal has Maya MacGuinness' fingerprints all over it.
If all the spending cuts are enacted, along with the middle class tax cuts but not tax cuts on the wealthy, roughly the same result maintains.
What the Republicans will object to more than the tax cuts is the fact that half the discretionary cuts come from Defense. Of course, the reality is that such cuts will likely be 75% of any future discretionary spending cuts, since the United States has no enemy justifying the size of the current military – or the bloated Pentagon structure.
The essential Defense cut, which the Commission does suggest, is the ending of all the generals on Pentagon rotation in the military departments. If almost everyone who wears a uniform were banned from Pentagon tours, you could cut manpower drastically.
I didn't miss the change in cap gains and dividends rates, up about 10%.
But I also didn't miss the drop in the Corporate Income tax, down about 10%.
If your effective tax rate drops 10%, other things being equal, don't you get to pay out 10% more in dividend earnings?
Did I miss something?
Also, what is the point of “simplifying” to three brackets? Doesn't that just intentionally ignore the wildly skewed distribution of income in the country?
From a tax perspective, I found it interesting that they claim to “repeal the AMT,” but what they end up proposing is a broader tax base (i.e. fewer deductions) with only three brackets resulting in a flatter tax. Sounds like the AMT…
Obviously, we need to wait to see the final report, but I also suspect that this version of the income tax would be inherently more regressive, even with the lower rates, because many of the deductions or exemptions that taxpayers currently get to offset their income would vanish.
Ummm… This capping federal revenues at 21% of GDP. I am just imagining that?
Brad DeLong