What the Joint Tax Committee Really Said About Tax Reform

By :: October 15th, 2012

On Friday, congressional Democrats released the results of a new analysis of base-broadening, rate-cutting tax reform by the Joint Committee on Taxation. For reformers everywhere the results seemed exceedingly grim: By eliminating all deductions, Congress could reduce tax rates by only a puny 4 percent without adding to the deficit. The top tax rate, for instance, would drop from 39.6 percent to just 38.2 percent.

In other words, if JCT is right, lawmakers would have to take the political heat for going after popular deductions such as those for mortgage interest or charitable giving and they best they’d have to show for their pain would be a tiny reduction in rates.

These estimates of what would happen under one theoretical tax rewrite sent reformers, not to mention the Romney campaign, into a frenzy. How could Romney pay for his 20 percent across-the-board rate cut if JCT could only get rates down by 4 percent?  How could the bipartisan fiscal plans we’ve seen over the past couple of years both lower rates and cut the deficit if eliminating tax expenditures generates so little money? Even my colleagues at the Tax Policy Center, who have estimated much larger effects of broadening the tax base, would be very wrong.

The JCT estimates matter because, unlike all those other groups, including TPC, the Joint Committee is the official congressional arbiter of tax proposals. If JCT says your tax plan doesn’t generate enough money to pay for the rate cuts you want, it doesn’t. End of story.

But a close look at what JCT did tells a somewhat different tale, and gives reformers some much needed oxygen.  The congressional staffers got these results because they took a very narrow view of base-broadening, and because they started from a different (though not surprising) place. The JCT:

  • Starts with a “current law” baseline. Thus it assumes most of the tax cuts enacted over the past decade have expired. Thus, for instance, rates are back up to where they were in 2000 and the Alternative Minimum Tax is no longer patched, thus hitting millions of middle- and upper-middle income households. By contrast, many other tax rewrites assume today’s tax law is made permanent prior to reform, which allows them to dedicate more dollars to rate reduction.
  • Repeals the AMT and limits on itemized deductions and personal exemptions for high-income households. This alone eats up over $1 trillion.
  • Eliminates itemized deductions and the tax exclusion for newly issued municipal bonds but leaves untouched other big ticket tax preferences such as the exclusion for employer-sponsored health insurance, tax credits, and tax breaks for contributions to retirement and pension plans.
  • Extends the current, relatively generous versions of the earned income and child credits, at a cost of over $400 billion.
  • Taxes capital gains at ordinary income rates, which loses revenue since investors will take fewer gains in response to those higher rates.

Because JCT starts with higher rates, it may generate more from eliminating deductions than other plans. Still, while the JCT experiment would produce about $2.6 trillion from its base-broadeners, Marc Goldwein of the New America Foundation figures only about $700 billion is used for rate reduction.

The JCT plan is very different from other tax reform proposals. For instance, Alan Simpson and Erskine Bowles, the chairs of President Obama’s fiscal commission, designed a reform that could get rates as low as 28 percent, but did it by eliminating nearly all tax preferences (not just deductions) and scaling back the few that survived.

So, it turns out, JCT doesn’t contradict groups like the Rivlin-Domenci Commission or Simpson-Bowles, it  merely uses different assumptions.

Does it discredit Romney’s plan, as Democrats hope?   Romney’s spokeswoman said on Friday that the JCT study “says nothing about the pro-growth tax reform proposed by Mitt Romney.”  Well, that may be true. But since Romney won’t tell anyone what his plan is, there is no way to know.

The JCT study is best read at 50,000 feet: There are many theoretical models for base-broadening, rate-cutting tax reform, and some efforts to squeeze tax preferences will generate a lot more money than others. But however you do it, tax reform is hard. It isn’t impossible, and it is surely worth trying. But it is very hard.

7Comments

  1. Michael Bindner  ::  2:20 pm on October 15th, 2012:

    I don’t think a tax reform that does not both beef up the child tax credit (and eliminate more of direct welfare and family tax subsidies in exchange) and shift most collection to consumption taxes or automatic filing (as Graetz, Bindner, Lindsey and Burman do) is really worth the effort. Better to just let some or all of the Bush cuts to expire than to go through with that much work for so little payoff – although gutting the mortgage interest deduction would prevent homeowners from using their homes as ATMs, which would prevent the same kind of bubble we just experienced from happening again.

  2. Tax Roundup, 10/16/2012: A rate-cutting tax reform for Iowa? Also: tax season is now really over. « Roth & Company, P.C  ::  9:27 am on October 16th, 2012:

    […] What the Joint Tax Committee Really Said About Tax Reform (Howard Gleckman, TaxVox) […]

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  4. Brian Dell  ::  2:27 pm on October 16th, 2012:

    I’ve been waiting for this blog to respond to the JCT analysis. I shook my head when I saw David Brooks say on PBS last Friday that “…somebody released a study today. If you got rid of every loophole out there, you could reduce the rates by 4 percent.”

    The TPC does great analysis, but the TPC hasn’t been helping the reform agenda very much, and that’s primarily because you hand too much ammunition to people opposed to reform with your critiques of various reform plans as they are actually proposed. Obama mentioned S-B in his convention speech but then almost in the same breadth said the mortgage interest deduction would never be touched. Biden demanded that Ryan guarantee that the deduction and when Ryan took a pass, instead of saying, OK, we got our policy difference, let’s move on, everybody demands more details. How about letting the prospect of reform get on the table first?

    Let’s not politically naive here. Policy decisions involve tradeoffs. If the political debate is all about detailing the cost to Peter in a proposal to take from Peter to pay Paul, the proposal is effectively doomed. I suggest giving the proposal a chance to gain traction first by noting its upside or at least holding fire on the particulars of the downside. There will be more than enough advocates for the status quo without piling on.

  5. Brian Dell  ::  2:37 pm on October 16th, 2012:

    Continuing in this vein, I note that Bruce Bartlett poured cold water on the 1986 reforms on the NYT’s Economix blog today, saying they didn’t make a meaningful contribution to economic growth. With friends like these…

  6. David Walmsley  ::  4:29 pm on October 17th, 2012:

    TAX REFORM: A MODEST PROPOSAL

    The United States is rife with economic problems: high unemployment, massive deficits, a downgraded credit rating and, above all, an inefficient, unfair, overly complicated and virtually incomprehensible system of financing the government’s activities.

    THE PROBLEM: the Internal Revenue Code

    1. At 70,000 pages in length and counting, the tax code is a labyrinth of complexities and a treasure trove for well-heeled taxpayers to game the system.

    2. By encouraging tax avoidance through deductions, exemptions and credits it sows the seeds of it own undoing. Rather than focusing on the collection of revenue, it is full up with provisions designed to thwart that purpose.

    3. It fails miserably at another of its misguided premises: to encourage or discourage certain activities which process is commonly referred to as “social engineering.” Has anyone really quit smoking solely on account of the high tax on cigarettes?

    4. The result is a non-system referred to as a “mess” or an “extraordinarily complex mess.”

    a. All taxpayers are cheaters either through legally permitted provisions of the tax code or by lobbying Congress to enact provisions giving this or that industry a tax advantage or by simply taking cash remuneration for goods or services and not reporting it.

    b. The tax code is a wholly inappropriate vehicle for bringing about societal changes, i.e., social engineering.

    c. The tax code and the government’s forever tinkering with it make for uncertainty and therefore, reluctance to take action in business planning, estate planning or in one’s daily economic decision making, e.g., whether or not to buy that new hybrid car.

    THE SOLUTION: scrap the Internal Revenue Code and replace it with the GIST Tax

    PFB / (GDP + I + T) = GIST Tax Rate

    PFB is the Proposed Federal Budget which is $3.82 trillion

    GDP is Gross Domestic Product which is $14.7 trillion

    I is the value of all Imports into the U.S. which is $2.4 trillion

    T is the value of Transfers of money or monetary equivalents by way of gift or inheritance which is estimated to be $590 billion

    Therefore our denominator is $17.69 trillion which divided into our numerator of $3.82 trillion yields a GIST Tax Rate of 21.59%

    Thus, every purchase of goods or services, every import and every transfer of money or monetary equivalent will be subject to a tax of 21.59% and that’s it! No more income taxes, no more excise taxes, no more gas taxes, no more inheritance or gift taxes—just the GIST Tax.

    It should be noted that this GIST Tax is only a few percentage points higher than most European countries’ VAT taxes which are assessed on top of, not in lieu of, income and other taxes.

    THE ADVANTAGES OF THIS SYSTEM:

    • Simplifies the tax code
    • Ends tax cheating
    • Makes taxes fair and equitable
    • Eliminates tax loopholes
    • Brings about universal compliance with the tax code
    • Makes revenue collection more efficient
    • Overcomes uncertainty in tax planning
    • Rationalizes gift and estate tax planning

    WHILE AT THE SAME TIME IT:

    • Balances the budget
    • Ensures the viability of government debt
    • Lessens the influence of special interests
    • Fosters “transparency” in government
    • Eliminates waste in government programs
    • Gets the American people more interested and involved in their government
    • Strengthens Social Security and Medicare
    • Actually starts paying down the national debt
    • Improves the international balance of payments or trade deficit
    • Makes American businesses more competitive in world markets
    • Motivates American corporations to repatriate their headquarters, profits and manufacturing facilities back to the U.S.A.
    • Gets Americans back to work
    • Sparks a surge in economic growth
    • Restores American’s faith in their country and its economic and political systems

    HOW DOES IT DO ALL THIS?

    1. Scrapping the tax code means no more income taxes for anyone—not corporations, not individuals, not small businesses; therefore no more cheating, no more loop holes, no more quarreling about the effects of this or that “reform.”

    2. More money in everyone’s pocket means more spending, more production, more investing in equipment, inventory and personnel, i.e., jobs.

    3. With no tax code to game, the special interests will have far fewer opportunities for lobbying the government for special treatment and can actually concentrate on their businesses instead of on tax avoidance.

    4. All the IRS agents and enforcers can be put to work on government contracts rooting out all the fraud thereby saving the taxpayers billions.

    5. The GIST Tax formula automatically balances the budget; therefore no more borrowing, no more downgrades and no more uncertainty.

    6. Medicare and Social Security will no longer be a payroll tax but part of the PFB and therefore fully financed by the GIST Tax.

    7. By including Imports in the GIST Tax formula, the U.S. begins to rationally tax goods from abroad while at the same time making domestic goods and services more attractive to foreigners.

    8. With no income tax, there is no longer a reason for businesses to park profits abroad nor to invest those profits in more business friendly offshore locales.

    President Obama and the Congress are agonizing over Taxageddon and how to avoid a major catastrophe come January 1. 2013. I say enact the GIST Tax now and all the other problems become manageable in a rational debate conducted over time with no Sword of Damocles hanging over the government’s head.

  7. Tax Roundup, 10/18/2012: Iowa tax reform battle shapes up. Also: shaming the shameless. « Roth & Company, P.C  ::  9:52 am on October 18th, 2012:

    […] Gleckman,  What the Joint Tax Committee Really Said About Tax Reform The JCT plan is very different from other tax reform proposals. For instance, Alan Simpson and […]