A Tax By Any Other Name

By :: June 30th, 2011

"What's in a name? That which we call a rose
By any other name would smell as sweet."

William Shakespeare

If I understand correctly, Congressional Republicans will not support job killing tax increases of any kind as part of a plan to reduce the federal deficit. They may, however, support non-job killing revenue raisers.

Newspapers are full of unnamed GOP sources talking about how the leadership might sign on to (or at least not object to) such ideas as ending some ethanol subsidies or changing the way business inventories are taxed. More broadly, Marty Feldstein, who was President Reagan’s chief economic adviser, has proposed limiting the benefit of individual tax preferences.

There are many ways to curb the value of deductions and credits. In his recent budgets, President Obama proposed capping their economic value at 28 percent for those in the top two tax brackets. More recently, Obama aides have talked about curbing tax breaks for those making $500,000 or more. Feldstein would cap deductions at no more than 2 percent of income for all taxpayers.

There are important differences among these ideas. While they all seem very complicated, each could generate substantial new revenues without raising tax rates. And all else equal, most economists agree that curbing tax preferences is a far better way for government to raise money than boosting rates.

The issue, however, is not economics. It is politics. Would some sort of cap on tax preferences be palatable to Republicans when a tax hike clearly is not? The optimistic answer is “maybe,” especially since, as my Tax Policy Center colleague Donald Marron noted the other day, many deductions and credits look very much like spending.

This would not be the first time a bit of linguistic circumlocution got the country out of a revenue bind. Former Senate Finance Committee chair Bob Dole (R-KS) was a master of the art. Dole not only helped Ronald Reagan pass a landmark tax cut in 1981, but he then turned around and engineered tax hikes in 1982, 1983, and 1984. Those tax increases totaled more than 1.5 percent of Gross Domestic Product (equal to an annual tax hike of more than $200 billion today). But to Dole, they were never tax hikes. Rather, he’d insist with a twinkle in his eye, they were revenue enhancement measures. And Reagan signed them all

The late Fred Kahn, the Cornell University economist who had the great misfortune of serving as President Carter’s inflation czar, also understood the importance of words. Once, his political minders ripped Fred for worrying aloud about the potential for an economic depression. Kahn, who was more than a bit of a Marxist (Groucho, not Karl), happily revised his prediction. We were, he said, at risk of the worst banana in 45 years. After the head of United Fruit objected, Kahn amended his warning again: We are now at risk, he cautioned, for the worst kumquat in 45 years.

A couple of weeks ago, I learned first-hand just how sensitive folks are about all this. I blogged about Senate GOP support for repealing ethanol subsidies and was criticized by some commenters for calling this a tax hike rather than a spending cut. Apparently, they would have been more comfortable had I avoided the dreaded t-word.

As Dole and Kahn realized, Shakespeare was quite right. What matters is the reality, not the words. Tax hikes are not going to smell very sweet to any of us. But the government needs revenues as well as spending cuts to get the deficit under control. And if it will make people happier, let’s call ‘em kumquats.

5Comments

  1. Vivian Darkbloom  ::  2:56 pm on June 30th, 2011:

    “There are many ways to curb the value of deductions and credits. In his recent budgets, President Obama proposed capping their economic value at 28 percent for those in the top two tax brackets. More recently, Obama aides have talked about curbing tax breaks for those making $500,000 or more. Feldstein would cap deductions at no more than 2 percent of income for all taxpayers.”

    There is a very real substantive difference between these two proposals. If one were to eliminate the personal exemption for all taxpayers, this would be the functional equivalent of raising taxes across the the board. Because everyone enjoys the standard deduction ratably, there is little difference between raising tax rates ratably and eliminating this deduction which is available to everyone. If the proposal is to cap deductions at 2 percent of AGI, this would have the similar effect of raising taxes (or reducing spending) across the board. While not everyone benefits currently from deductions, the general idea behind the Feldstein proposal seems to be that everyone should feel the effect of the tax law change more or less ratably.

    The idea to limit deductions only with respect to “high income” taxpayers is quite a different proposition. In other words, for some folks, this “rose would not smell as sweet” and for others it would smell even sweeter, but of course that’s the underlying idea here. And, don’t forget that Romeo and Juliet was a tragedy. Perhaps Feldstein had “Measure for Measure” in mind, which is normally characterized as a “problem play”. In any event, this commentary by Gleckman has all the makings of a farce.

    Let’s stop the farce and call a rose a rose. If you want to reduce the deficit and simplify the tax code, then eliminate tax expenditures and have the honesty and the courage to do so across the board. Anything less is just political rhetoric, as usual. Shakespeare would not be fooled.

  2. Ralph H  ::  5:03 pm on June 30th, 2011:

    Tax expenditures are seductive to both sides of the aisle, and we would be much better off if they were illegal, because that’s the only way to get rid of them! But there are many of these that were put in to bolster the middle class, like deductability of local taxes, home interest and health care. Then there are subsidies for ethanol, window replacement and hybrid cars — who is against the environment? I feel we might be able to get a “big picture” solution that eliminates all these preferences coupled with drastically lower rates. You would want to call it something like a “Simple Tax” and come up with a 2 page form that the average taxpayer could fill out. Republicans would like that kind of solution, particularly if it was coupled with a “hard cap” on spending. Democrats would have to give up their tendancy to direct spending on favored industries, and focus on only essential services to fund. It would take a real leader and I fear nobody in the adminstration or in congress will step up to the plate.

  3. Michael Bindner  ::  11:07 pm on June 30th, 2011:

    Tax Notes took a pass on my piece on why do tax reform, specifically a VAT. My argument was that there was no reason to unless you shift tax benefits from rich mortgage borrowers and property holders to families with children, for a $500 per child per month refundable tax credit.

    Since we already have health care reform, the only reason the GOP still resists a VAT is that this is the kind of spending they really don’t want – which has their anti-abortion rhetoric ring hollow.

  4. SteveinCH  ::  6:03 pm on July 2nd, 2011:

    Another substantive difference is that eliminating tax expenditures simplifies the tax code and both the Feldstein and Obama proposals make a complex code even more so.

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