How Would the House Budget Resolution Affect Tax Progressivity?

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.