A 20 Percent Tax Rate Cut Would Blow a Huge Hole in the Budget
In the back-and-forth over deficit reduction on Capitol Hill, Republicans have floated the idea of cutting individual tax rates by 20 percent across the board. There is much more to their plan: Crucially, they’d also trim tax subsidies. However, they don’t say how, so my colleagues at the Tax Policy Center looked only at what this broad rate cut would mean for the deficit. And the answer is nothing good.
The plan would cut individual income tax rates to 8 percent, 12 percent, 20 percent, 23 percent, 27 percent and 28 percent (rounded up to the next 1 percent). Compared to current law (that is, assuming the Bush-era tax cuts expire as scheduled in a year) cutting rates would increase the deficit by nearly $200 billion in 2015 alone. That’s $200 billion in one year. Relative to current policy (or assuming the relatively low rates and other provisions of the 2001/2003/2010 tax law remain on the books) it would reduce tax revenues by more than $150 billion in 2015.
This seems to violate the useful old aphorism that suggests, “When you are in a hole, the first thing to do is stop digging.”
These estimates assume Alternative Minimum Tax rates are left unchanged. If they also are reduced by about one-fifth, to 21 percent and 23 percent, the plan would lose more revenue than if the AMT rates remain at 26 percent and 28 percent. That’s because lower regular tax rates would only throw more households into the AMT, where they’d be paying at the higher 26 percent and 28 percent rates.
Also keep in mind that these are static estimates and assume no economic growth from lower rates. Most economists believe that, all else equal, cutting rates would boost the economy. However, much of this benefit would be lost over time if government has to borrow money in order to finance those rate cuts. That is to say, if Congress does not offset the revenue loss caused by the rate reductions with spending cuts or other tax hikes.
And that brings us back to the problem. This rate reduction plan was offered in the context of the congressional Super committee’s efforts to reduce the deficit by $1.2 trillion over 10 years. Starting off with a huge tax rate cut would deepen the 10-year hole by trillions of dollars. We’ve seen that deficit reduction isn’t easy, but it sure would help if the pols started by putting away their shovels.
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I agree with David that tax cuts alone isn’t the proposal. There have been several things floated. Sen. Toomey proposed rate cuts alongside elimination of certain current deductions which would help bring in revenue.
I have seen the Joint Committee on Taxation analysis that says the corporate tax rate could be only be lowered to 28% if all corporate tax breaks erased, not 25% like politicians are advocating for.
Obviously there has also been clamor to reform the personal tax code. Let’s assume for the moment that conservatives won’t pass anything that raises revenue through the tax code. If Congress decided at the very least to implement revenue neutral tax reform on the personal side (by only eliminating tax breaks) how much could they lower the rates?
How much could tax rates be lowered without getting rid of the big 3 tax expenditures (MID, Charitable Deduction, and exclusion for employer provided health care)?
How much could tax rates be lowered by eliminating tax expenditures including the big 3?
Lastly, how well would revenue neutral tax reform perform using conservative dynamic scoring?
Wow, that straw man is dangerous, isn’t he? Nobody is proposing rate cuts only. In fact, the Republicans on the SuperCommittee offered a package of rate cuts and simplification that offered a NET TAX REVENUE INCREASE of something like $500B (along with $700B of spending cuts) and the Dems rejected it. But why let facts get in the way of a baseless partisan hack job?
Still a billion short on the tax side.
Pardon me – trillion.
This sounds like the Fiscal Commission proposal, so I think you must also assume that they mean that tax expenditures are cut the same way. I would suggest outlining how cutting rates in this matter can be done with tax expenditure cuts so that the total ads up to a 1.5 trillion dollar revenue increase – with the balance of budget cuts adding up to $4 trillion and the Ways and Means and Finance Committees responsible for working out the details. At this stage, it might not hurt to assume they are really compromising – even though I disagree with this apprach. I would rather that some of the cuts be applied to a larger child tax credit instead, which would help the Social Security/Medicare/Medicaid demographic problem and help economic growth.
Offer to kill off the DOE and they will give up the cuts.