How Would the House Budget Resolution Affect Tax Progressivity?

By :: April 18th, 2011

The House-passed budget resolution may be the start of a serious conversation about how to address our growing national debt, or it may be an attack on essential government programs, or both. One attribute we can be pretty sure of, however, is that it is very likely to make the tax code much more regressive than it is today. As you wrap up your calculations for Tax Day 2011, keep in mind that under this proposal, taxes will rise for most Americans.

When it comes to revenues, the fiscal plan lacks important details. We know only that it would;

  • Cut the top individual and corporate tax rates from 35 percent to 25 percent.
  • Eliminate or reform tax expenditures (details left to the Committee on Ways and Means).
  • Limit total federal revenue collections to no more than 18 or 19 percent of GDP.

But that’s enough to draw some important conclusions.

The Tax Policy Center estimates that reducing the top tax rate to 25 percent would cut tax revenues by $2.9 trillion over the coming decade. Virtually all of the tax savings from that change would go to households making upwards of $200,000—the 5 percent of tax units who currently face marginal rates over 25 percent (including for the AMT). By itself, that tax cut would make the income tax decidedly less progressive than it is today.

Chopping away at the thicket of tax expenditures would reclaim some or all of the revenue lost to the rate cut and raise taxes on affected households. Because the House leaves that process entirely to the Ways and Means Committee, we know nothing about which taxpayers would lose the benefit of those tax preferences. But unless all of the costs fall on the top 5 percent who benefit from the rate cut, any reduction in tax expenditures must raise taxes on low- and middle-income households. Taking away tax benefits for high-income households would claw back some of tax savings the rich would get from the lower top rate but wouldn’t erase those gains entirely.

So the first two pieces of the Ryan plan would make the income tax less progressive. Could capping revenue at 18 or 19 percent of GDP reverse that?

If we cut revenues enough, the answer is yes, assuming the cuts go mostly to the non-rich. But they’d need to get huge cuts to offset the regressive rate cuts.

And according to Congressional Budget Office projections of federal revenues, Congress could keep taxes below the 18 percent cap until 2020 by doing nothing more than permanently extending the Bush-era tax cuts and other “temporary” provisions and that’s already part of the House-passed budget. Only later would the cap force congressional action. That doesn’t mean Congress wouldn’t cut taxes, only that it wouldn’t have to.

Following the House budget resolution would almost certainly shift more of the tax burden to low- and middle-income households and yield a less progressive tax system. Combining that with deep spending cuts doesn’t look like an equitable sharing of the costs of bringing the budget deficit under control.

11Comments

  1. Vivian Darkbloom  ::  12:10 pm on April 18th, 2011:

    At first glance, it appears that the proposal does indeed reduce progressivity. (For some, that’s not necessarily a bad thing). Nevertheless, the TPC seems to be stacking the deck here in favor of that conclusion.

    Cutting the top corporate tax rate to 25 percent is supposed to be tax neutral—i.e., additional revenues would be raised by eliminating corporate tax expenditures. Even if not tax neutral, I don’t see how this $900 billion gets put completely on the account of the top 5 percent of “income households” i.e., those earning more than $200,000 for purpose of this analysis. Most economists now argue that the corporate income tax is borne mostly by mainstream labor and the consumer.

    As for the other assertion that “virtually all of that savings ($2.0 trillion if you exclude the corporate tax part) goes to households making upwards of $200,000), I would be interested to see the detailed numbers to see exactly what “virtually all” means. Under current tax rates, singles earning over about $83,600 are subject to the 28 percent rate ($139,350 for marrieds).

    High income taxpayers enjoy, in total dollar and per capita terms, greater benefits from certain tax expenditures (but certainly not all of them and the biggest ones such as the EITC and the MWP credit are not on the chopping block). Whether eliminating them would make up for the alleged $2 trillion, remains to be seen. Indeed, we need more details.

  2. Sid F  ::  1:32 pm on April 18th, 2011:

    The post illustrates the problem of trying to do analysis and draw conclusions from an incomplete proposal.

    It is admirable to try, but sometimes, the answer “waiting for additional information” is about the best one can do. It’s like trying to solve a set of equations where there are more unknowns then the number of equations, there just is no unique answer, and the best case is sometimes to say nothing.

    The failure to provide an analysis of the Ryan proposal is not a failure of the analysts, it is a failure of the proposal to be complete, internally consistent or anything other than a bogus political statement. The analysis in this Post does more harm then good, because it treats as something serious and real a policy which is not serious and not real.

  3. AMTbuff  ::  1:43 pm on April 18th, 2011:

    If progressivity must always increase, the only possible endpoint is a 100% tax rate for incomes above $X and zero tax below $X.

    I would like to see an article in which any progressive stated a maximum of progressivity beyond which he or she would not go. Just as with the percentage of GDP spent by the government, there is no maximum other than “as much as we can get”.

    Similarly, anti-taxers rarely state what percentage of GDP is the minimum they would not go below. When they do, it’s generally in the low single digits. That’s also dream land.

    Back to the topic, I don’t buy the postulate that progressivity must increase always and everywhere. Fiscal reality may demand otherwise. Taxation in Europe is less progressive than in the US, primarily due to the VAT.

  4. Michael Bindner  ::  1:56 pm on April 18th, 2011:

    It would take massive defense cuts to get spending down to that range of GDP. It would also take the massive deleveraging of health care called for in the Ryan Plan – however reality seems to be going the other way – both in terms of costs and politics. There is no way that either the ACA will be reformed or that voters in the 35-55 range will accept the cuts Ryan proposes for their retirment.

    Tax reform will more likely lead to a consumption tax for discretionary spending of between 10% and 15%, depending upon how much that spending can be cut (it will likely start high and go down).

    A business receipts tax is a good candidate to deliver family tax benefits and health care benefits and to fund non-retirement income social services (but including retiree healthcare). I expect a rate of 33% before exclusions and credits and 27% after. A lower rate could come from shifting from government based programs to employer based programs – since once you deliver a large tax credit to both working families and families where the adults are in paid remedial literacy training you don’t need a lot in the way of federal personnel or pilot programs in those areas.

    The top income tax rate should equal the BRT rate after exclusions, roughly 27%.

    Ryan does not realize that cutting taxes on the wealthy and the merely well off does them no good as long as there is a debt to be paid back – or even a Social Security Trust fund to be redeemed. It is not the children who currently get the Child Tax Credit who will eventually repay the debt – it is the children of the top 20% of income earners. Expecting the “lower classes” to pay back the debt is a conservative core value – but once the income tax was enacted it is a value that is out of date. Cut back on funds going to the bottom 60 to 80% and you simply slow the economy. Cutting taxes on the top 20% actually speeds the economy since it takes money out of savings and puts it into consumption.

  5. Michael Bindner  ::  1:59 pm on April 18th, 2011:

    The main point to realize on the House Budget Resolution is that it is not binding on the Senate, will never be passed by the Senate without major compromises (if that is even possible) and therefore cannot be used to extend the 2010 tax cuts through reconciliation. Without Reconciliation, there is no chance that 60 votes are available to defeat the Budget Act point of order against them.

    Friday’s action was a stunt and we should speak no more about it.

  6. Vivian Darkbloom  ::  2:10 pm on April 18th, 2011:

    “Ryan does not realize that cutting taxes on the wealthy and the merely well off does them no good as long as there is a debt to be paid back – or even a Social Security Trust fund to be redeemed.”

    It appears to me that he understands this better than anyone else in the room. Why do you think he’s proposing massive spending cuts? And, as this post indicates, it remains to be seen whether the Ryan proposal would utlimately end up resulting in a “tax cut” in the sense of whether total tax receipts would be reduced.

  7. Michael Bindner  ::  3:40 pm on April 18th, 2011:

    No, because he does nothing to reduce the debt. Government will eventually pick up the slack for its own budget cuts.

    A voucher program actually works pretty well in a health care reform context, but not if the ACA is repealed – assuming the ACA does not lead to the end of private insurance – a real possibility – in which case the only serious question is what payroll, VAT or business receipts tax rate is necessary to fully fund health care.

  8. Sid F  ::  4:09 pm on April 18th, 2011:

    A couple of key facts.

    1. The Ryan Plan does nothing to pay down the debt, because the debt is never going to be paid down, it is perpetual and will be rolled over year after year unless it gets so large that it cannot be rolled over to non-government investors. In that case a combination of massive inflation and monetization of the debt will take place. That is what happens when sovereign debt gets out of control.

    2. The Ryan Plan is not serious about the deficit, because the deficit is not the issue with Radical Conservatives. The level of government spending is the issue. Anti-taxers do state a lower limit, 14-15% of GDP. For Grover Norquist, who has a majority of House members with him, the level of spending is the issue and getting the federal government to 15% is the goal. Interestingly, the Ryan proposal does this (if you beleive the numbers) in 2050. Of course, if you believe the numbers I have some a bridge in Brooklyn to sell you.

    3. Vouchers for private insurance for individual coverage and individual underwriting will not work, can never work and are impossible to work. Vouchers for group plans could work if the group is large enough and diverse enough, in fact if all persons over 65 were in a single group vouchers would work. Wait a minute, we have that currently with Medicare.

    4. Ryan believes in cutting taxes for the wealthy, in fact, that is his core belief. Who exactly do you think benefits from a top tax rate of 25%, even if some tax expenditures are reduced (unlikely, since in the first place no one will say which ones are candidates)?

    Finally, there is something we can all agree on

    “Friday’s action was a stunt and we should speak no more about it.”

  9. Michael Bindner  ::  11:16 am on April 19th, 2011:

    Workers certainly don’t benefit when taxes on the wealthy are lowered, since this makes it extremely profitable to lower wages as much as possible. Someone still needs to explain to me how that is good public policy – especially when the lowest wage worker is not here.

  10. Federal Budget Proposals Threaten Working Family Tax Credits | Tax Credits for Working Families  ::  4:14 pm on April 28th, 2011:

    […] and proposes paying for them with $2.5 trillion in unidentified expansions of the tax base. As the Tax Policy Center explains, those changes would almost certainly come from the pockets of low- and middle-income families, and […]

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