TaxVox: the Tax Policy Center blog

Holtz-Eakin Should Be OMB Director -- For Obama

Howard Gleckman — Thu, 07 Aug 2008 16:16:20 -0400

>If Barack Obama gets elected President, the first thing he should do is hire Doug Holtz-Eakin to be his budget director. A highly-respected non-partisan budget wonk, who is leaning Obama’s way in the election, threw out this seemingly crazy idea at lunch the other day. And the more I thought about it, the more sense it made.

Why would Obama want to hire John McCain’s chief policy advisor to run his OMB, perhaps the most critical policy shop in the Administration?

To start, Obama often talks about a post-partisan Presidency. This would be a way for him to show he means it.

Second, Holtz-Eakin would enjoy fiscal credibility in the financial markets. The bond vigilantes have not cared about deficits for years, but they tend to get interested when Democrats run the government. Just ask Bill Clinton. Today, they see Obama as little more than a big-government liberal with a good speech. This might show them he is more complex than that.

Most important, though, Holtz Eakin would help lower the stratospheric expectations the left has of Obama. The candidate has already made trillions of dollars in promises he cannot possibly keep, and liberals will demand hundreds of billions more if he and a Democratic Congress are swept into office in November. Of course, McCain has his own problems with super-sized promises, but that’s for another day.

How can Obama lower these expectations? He needs a Dr. No—someone who can bring some reality into the political debate. And who better than Holtz-Eakin, who even many liberals like and respect? They’d detest Obama’s decision to pick him, but someone has to play the heavy.

I don’t know if Holz-Eakin would take the budget job in a McCain Administration, much less in Obama’s. And I can’t imagine he’d get the offer. Besides, with the election still nearly 12 weeks away, the whole thing is more than a bit premature. Still, it is an idea worth musing about in the heat of a Washington August day. Just a thought.

Great Marketing, But Is It Good Tax Policy?

KimRueben — Tue, 05 Aug 2008 15:59:48 -0400

Right after the housing bill was signed, I opened up my personal e-mail to find this:

Dear friends,

Great News!! President Bush just signed into law the Housing and Economic Recovery Act of 2008. This is a major victory for REALTORS®, consumers, and our nation!

Homebuyers will soon have access to more affordable financing, and first-time homebuyers (those who have not owned a home for three years) will receive a tax-credit to help them enter the market. For more details on all of the provisions in the new law, please use the link below.

How a realtor in Milpitas got my e-mail address, I don’t know, but she sure is convinced that the new law will bring buyers back into the market. But is the first-time homebuyers’ credit really a good deal for consumers and our nation?

Unlike other credits, the new one is really a 15 year interest-free loan. Qualifying buyers will get a refundable credit of the smaller of 10 percent of their purchase price or $7,500 for homes bought between April 2008 and June 30, 2009. Because they don’t get the credit until they file a tax return—and not when they buy the house—it’s unclear how much the cash windfall will help with down payments—which presumably was the whole idea. And interest-free doesn’t mean free: they must pay the money back to the government over 15 years.

You can see why real estate agents and homebuilders love it. It fairly screams: Buy now and get $7500 off! But you must act fast! Assuming we are no longer in a world with no-money-down home purchases, what would the new credit really do?

For people who have the money to buy a house but have been waiting to enter the market, the credit could encourage them to buy now rather than later. If home prices fall by another few percentage points, the tax break will help cushion the blow of falling home prices.

But what about the person who is on the edge of being able to afford to buy at all—the one who needs the money for the down payment? Assuming there will be ways of accessing the money quickly they face lower upfront costs but higher future expenses. Isn’t this a lot like the financing game that got us into the housing mess in the first place? It would be a shame if the government ends up effectively setting up the next generation of defaulting home-owners.

At least the current credit is an improvement over an earlier tax break proposed for people buying foreclosed property. Still, adding yet another credit to the hundreds of billions in tax breaks we already lavish on homeowners makes me wonder whether we should step back and rethink whether owning is truly the answer for everyone.

In Defense of the Blue Dogs

Howard Gleckman — Thu, 31 Jul 2008 17:01:21 -0400

Liberal bloggers have taken to ganging up on the Blue Dogs—conservative Democrats who tend to go their own way on fiscal and foreign policy issues. Smelling victory in November, some on the left would like to find a way to take out these lawmakers, who mostly represent southern and midwestern swing districts.

The left’s biggest objection seems to be the Dogs’ support of both the Iraq War and the Bush Administration’s aggressive “war on terror,” including its curbs on domestic civil liberties. I’m not going there. After all, this is a tax blog. But when Ezra Klein charged in a post the other day that the Dogs were also pro- tax-cut sell-outs in thrall to business lobbyists, that was a bit too much.

I’ll take Ezra’s word for it that these pols take lobby money. They are, after all, congressmen. But they are hardly knee-jerk tax cutters.

In fact, conservatives regularly rage against the Dogs for opposing the Bush tax cuts. Last year, the National Taxpayers Union gave them a collective grade of D for their lack of featly to its agenda. Rep. Jim Cooper (D-Tenn) got an average NTU rating of 26 out of 100 over the past five sessions of Congress. Nick Lampson (D-Tex) averaged an 18, not much better than Barack Obama, who scored a9. Earl Pomeroy (D-ND), averages about a 20 from Grover Norquist’s Americans for Tax Reform.

These ratings can sometimes be silly, but the message is clear: In the eyes of the anti-tax crowd, the Dogs are far from reliable friends. Andthey have made some very tough votes along the way.

I wish they were tougher on spending. Not surprisingly, since many of the Dogs represent rural districts, they have not been keen to cut farm subsidies. And they have been disappointingly soft on other efforts to trim spending. Still, they are better than most.

Finally, there is the politics of all this. Despite the fervent wishes of the left, a 2009 spending spree, which would generate either more borrowing, higher taxes, or both, is neither good for Democrats nor the country. Having a few Blue Dogs around to provide cover for a bit of fiscal prudence may not be such a bad thing. Besides, why would any Democratic partisan want to replace a conservative Democrat with an even more conservative Republican, which would be the inevitable result of such a purge.

As any politician can tell you, kicking a Dog is never a good idea.

Don't Read My Lips

Len Burman — Wed, 30 Jul 2008 16:57:00 -0400

For a brief 48 hours, it looked as if John McCain was courageous enough to say something sensible about tax policy—and as a result was immediately attacked by both the right and the left.

Today’s Wall Street Journal reported disapprovingly that McCain would consider payroll taxes as a way to bolster Social Security’s finances.“Mr. Stephanopoulos [on ABC’s This Week] pressed, ‘So that means payroll tax increases are on the table, as well?’ Here came the words that have caused the McCain campaign well deserved grief: ‘There is nothing that's off the table. I have my positions, and I'll articulate them. But nothing's off the table.’”

The Journal also reported that the Democrats were preparing attack ads accusing McCain of flip-flopping and hypocrisy on taxes since he’d earlier vowed to never raise taxes and had criticized Senator Obama for saying he would.

This was a good flip-flop, though—like Obama’s grudging acceptance that the surge in Iraq, which he’d initially opposed, seems to be working.We should cheer when candidates recognize reality, however late in the game. I don’t know if higher payroll taxes should be part of the solution to Social Security’s long-term ills, but why rule them out before negotiations even begin?It is simple arithmetic that any sensible solution requires cuts in benefits, higher taxes, or some combination of the two.Ruling out options 2 and 3 would wreck any reform effort.

More fundamentally, the enormous demands placed on government by the retirement of baby boomers and rising health care costs will, at some point, require additional revenues.Slowing the growth of spending, especially for the big entitlement programs—Social Security, Medicare, and Medicaid—is necessary too, but almost nobody believes that will be the whole solution.

But, alas, today it was back to read my lips: “I want to look you in the eye: I will not raise your taxes nor support a tax increase,” he said … at a town-hall-style meeting at the Wagner Company, a Caterpillar dealer. “I will not do it.”

Sigh...

The Bush Deficit: "This is Going to be a Challenge"

Howard Gleckman — Tue, 29 Jul 2008 16:40:05 -0400

To paraphrase the oily Captain Renault of Casablanca fame, we in Washington are shocked, shocked to find that deficits are going on here. To listen to the cries of outrage and dismay, one might think the Bush Administration’s latest projection of nearly $400 billion in red ink for the fiscal year ending on Sept. 30, and almost $500 billion for next year was unexpected.

After all, if we happily run significant budget shortfalls when the economy is flush, why should we surprised that they grow when it is soft?

The Bush math is very simple, really. Based on the White House projections, from the time the President came into office in 2001 until he leaves in fiscal 2009, Medicare spending will nearly double from $214 billion to $417 billion, fueled in large part by his new Part D drug benefit. Military spending will more than double. Officially, OMB says defense costs will rise from the ’01 level of $334 billion to $675 billion, but that assumes only $70 billion for the wars in Iraq and Afghanistan in 2009—far below the real price, which is likely to hit $200 billion.

While this big ticket spending explodes, income tax receipts will be less than one-third higher, or about $500 billion more, in ’09 than in ’01. And medium-term revenues are likely to be lower than projected since Bush assumes no fix for the Alternative Minimum Tax after 2009, an item which will cost more than $70 billion. Ironically, while John McCain and Barack Obama want us to assume a budget baseline where the costs of the war and an AMT patch go on forever, Bush does not.

As Budget Director Jim Nussle said yesterday, in a bit of uncharacteristic understatement, “This is going to be a challenge.”

Indeed. Especially if, like Obama and McCain, you hope to govern the country after Bush moseys on back to Texas. Yet, while the budget hole deepens in front of their eyes, the candidates keep making implausible promises.

McCain insists he’d balance the budget by 2013 but proposes a tax plan that would increase the national debt by $5 trillion over the next decade, even as he offers no credible way to slash spending by close to that much.

Obama economic adviser Austan Goolsbee told TPC last week that the campaign is aiming for a deficit no larger than this year’s $400 billion by 2013. Yet even meeting that low bar won’t be easy in the face of his tax plan, which would increase the debt by $3.4 trillion by 2018, and his ambitious new spending plans for health care, the environment, and education, which would add billions more.

Bush’s new budget estimates are a reality check on both candidates. They tell us that there is no way McCain can cut taxes by as much as he promises and there is no way that Obama will cut taxes and boost spending by as much as he wants.

That is, I suppose, comforting in some inside the Beltway way.

Refundable Tax Credits in the Obama Proposal

Len Burman — Fri, 25 Jul 2008 13:51:25 -0400

A questioner at our forum on the candidates’ tax plans asked about the portion of Senator Obama’s tax proposals that would go to households with no tax liability. I did not have the answer then, but Jeff Rohaly has since crunched the numbers. He estimates that the refundable portion of tax credits (other than for healthcare) would increase by $648 billion over ten years in the Obama plan. The new credits would also increase the percentage of households that do not owe income tax in 2009 from 38 percent under current law to 48 percent in the proposal, although that percentage will decline over time as real incomes grow.

By budget scorekeeping convention, the refundable portions of tax credits are treated as outlays—that is, the same as direct spending—rather than as tax reductions. Under current law, outlays on the earned income tax credit and the child tax credit (and several much smaller refundable credits) will total $406 billion from 2009 to 2018; Senator Obama’s proposals would increase the total to $1,054, or almost 160 percent.

There’s an interesting debate about refundable tax credits. On the one hand, some critics argue that “tax cuts are for taxpayers,” meaning that refundable tax credits should not be part of the tax cut agenda. The Wall Street Journal editorial page once famously opined that people with incomes too low to owe income tax were “lucky duckies,” undeserving of tax relief.

On the other hand, a lot of what we call tax cuts are really spending programs in disguise. Does it really make sense to provide subsidies for health care, homeownership, saving, education, etc., in such a way that the people who most need assistance—those with low incomes—are automatically disqualified? For that reason, Lily Batchelder, Fred Goldberg, and Peter Orszag have argued that all tax subsidy programs should be converted to refundable credits.

While this debate rages, there seems to be general agreement that refundable credits are the way to go to expand health insurance coverage. President Bush proposed refundable credits several times before switching to his standard deduction for health insurance. Senator McCain’s proposal is basically the president’s, but provided as a refundable tax credit instead of a deduction. This is likely to be much more effective in targeting assistance to those who need help affording insurance. And Senator Obama’s subsidy scheme is also fully refundable, and even more targeted at those with low incomes.

I’ll post an estimate of the refundable portion of the health tax credits for both proposals next week.

The Obama Rate

Howard Gleckman — Thu, 24 Jul 2008 14:07:36 -0400

Barack Obama’s fiscal policy can be summarized pretty simply: Cut taxes for low- and middle-class Americans, boost spending for education, health care, and alternative energy, and pay for much of it raising taxes on the rich. That’s not the only way he’d finance his ambitious plans, of course—he’d also have to borrow $3 trillion and get some money from ending the war in Iraq—but he hopes to generate nearly $300 billion over the next decade just from rolling back the Bush tax rate cuts on high-bracket taxpayers.

The numbers are quite striking, according to a new TPC analysis of the Obama plan: Middle-income families would see their taxes cut by about $1000 annually or 5 percent, while those in the top 1 percent (with incomes in excess of $600,000), would pay $130,000, or about 2.7% more. And that does not include the likely impact of Obama’s still-vague plan to boost payroll taxes on those earning more than $250,000. That proposal alone could increase taxes on those high earners by an additional $400 billion over 10 years.

Taxing the rich may be a political winner, but it runs the risk of creating some big economic problems. TPC figures Obama could boost the top effective marginal income tax rate to 46 percent, assuming a 2 percent payroll tax increase. In a high-tax jurisdiction such as New York, the combined state, city, and federal rate would top 50 percent. If high-earners have to pay the full Social Security payroll tax, their rates could approach 60 percent.

We’ve seen those rates before—they have been as high as 90 percent-- and we’ve got a pretty good idea what happens. When labor is taxed that much, wealthy people will find a way to turn ordinary income into capital gains and dividends, or to defer income. The result: At these levels, rising rates generate tax avoidance, not more revenue.

John McCain argues that these high rates will hurt small business most, but that claim is shaky. Fewer than 2 percent of taxpayers with business income are in the top bracket. These entrepreneurs may aspire to millionaire-hood, but most will never get there.

Still, Obama’s effort to make the highest income Americans pay for more of government through higher tax rates will not come without a price.

Holtz-Eakin and Goolsbee Square Off in the Great TPC Tax Debate

Howard Gleckman — Wed, 23 Jul 2008 18:03:43 -0400

TPC sponsored a fascinating debate today between John McCain’s top policy adviser, Doug Holtz-Eakin, and Barack Obama’s senior economic adviser, Austan Goolsbee. More than anything, I was struck by how much time each spent criticizing the other guy’s fiscal plan rather than promoting their own.

The discussion coincided with TPC’s release of an updated analysis of the candidates’ tax plans. The new report concludes that both will significantly increase the deficit over the next decade. Including interest costs, Obama would do so by $3.4 trillion, while McCain would raise the deficit by $5 trillion. The Obama plan would cut taxes for most people, but raise levies significantly on the very wealthy. McCain, but contrast, would cut taxes for nearly everyone, but provide by far the biggest reductions for those making the most money.

McCain’s primary policy goal is economic growth, Obama’s is progressivity. These are big and interesting contrasts, and it would have been nice to learn more about what drives their bosses’ agendas. But, instead, I mostly heard why the other candidate’s plan is so awful.

Goolsbee talked a lot about McCain’s “budget shammery.” It is a nice turn of phrase, but neither candidate gets high marks for transparency. Both prefer to use a budget baseline that assumes the Bush tax cuts will go on forever and that the Alternative Minimum Tax will be permanently “patched.” I understand why, since that appears to give them more money to pay for campaign promises. But, in truth, both candidates are hiding a lot of fiscal irresponsibility behind these wonky arguments over baselines.

Holtz-Eakin gets credit for giving a straight answer to a very important question; How much tax revenue is right? In the short term, he said about 18 percent of Gross Domestic Product. Since he also said McCain wants to balance the budget by 2013, he is suggesting that spending also ought to be about 18 percent of GDP. That implies some pretty tough cuts in current government programs, which cost more than 20 percent of GDP.

There are serious questions about whether McCain could get there, and what kinds of spending cuts it would take, but at least I came away with some idea of where he is headed. Goolsbee, by contrast, ducked the question at least twice. The closest he came to an answer was to concede that Obama’s 2013 deficit would be lower than this year's, which will exceed $400 billion. Not exactly a high fiscal bar.

Would an Optional Tax System Boost Economic Growth?

Howard Gleckman — Tue, 22 Jul 2008 16:47:42 -0400

In response to my blog the other day about economists endorsing John McCain’s proposal to create an alternative individual income tax, Winghunter asked a perfectly reasonable question: What would such a scheme do for the economy?

Winghunter was asking about a version proposed earlier this year by Fred Thompson, a plan which mimics one first put out by the House Republican Study Committee. But the idea is essentially the same: Individuals would figure their liability under both the regular income tax and a simplified lower-rate alternative and pay whichever is less.

TPC has concluded that such a Thompson-like tax system would reduce federal tax revenues by an eye-popping $7 trillion over 10 years. But, getting back to Winghunter’s question: What would that do for the economy?

The short answer is nothing good. A conventional lower-rate structure would boost growth, but only if it is financed, either by spending reductions or tax increases. It happens that CBO has just released a report that looks at the economic effects of a much more modest plan—permanently indexing the Alternative Minimum Tax and extending the 2001 and 2003 tax cuts. It estimated that unless these tax cuts are paid for, deficits would reach 5 percent of GDP by mid-century and 18 percent by 2082. Eighteen percent of GDP happens to be about what we collect in total tax revenues each year. Hello Argentina.

In this study, CBO director Peter Orszag says the economic consequences of such a flow of red ink are literally unimaginable. As he put it, “projected deficits would grow to levels well beyond the range for which economic models have been developed.” Diane Rogers over at economistmom.com has a nice take on this.

Of course, some on the Right may try to dismiss Orszag’s analysis since he used to work in the Clinton Administration and at The Brookings Institution—a think tank Winghunter dismisses as “liberal.”

Trouble is, Orszag’s analysis is essentially identical to what CBO was saying 5 years ago, when its director was Doug Holtz-Eakin, a highly-respected conservative economist who is now John McCain’s chief economic adviser. This is what he said about the impact of tax cuts that are not financed:

“Sustained and rising budget deficits would affect the economy by absorbing funds from the nation’s pool of saving and reducing investment in both the domestic capital stock and foreign assets… As a result, the growth of workers’ productivity would gradually slow, real wages would begin to stagnate, and economic growth would tend to taper off. If that situation continued long enough, rising deficits could actually lead to a sustained contraction of the economy.”

So, no problem. All we need to do is find a way to cut $700 billion-a-year from the $3 trillion federal budget. Until we do, it is pretty clear that tax cuts of this magnitude are nothing but bad for growth.

Medicare: I'm in favor of Competition -- Except When I'm Not

Howard Gleckman — Thu, 17 Jul 2008 16:42:21 -0400

It wasn’t exactly So You Think You Can Dance, but watching Congress and President Bush boogie their way through the final song of the recent Medicare prom was still a hoot.

In the end, Hill Democrats stomped Bush and, despite his veto, easily passed a Medicare bill that delayed, yet again, mandated cuts in physician payments. The Dems did so while insisting they were for both true competition and fiscal responsibility. Bush, trying to claim those same virtues for himself, had unsuccessfully tried to block the bill, insisting it would hurt beneficiaries by curbing their access to managed care plans.

Even by Washington standards, Bush wins a chutzpah award for attempting to justify a 13 percent subsidy to private managed care companies in the name of market competition. Medicare managed care, done properly, might improve patient outcomes and save money. But we have never seen it done right, despite at least three tries over the past two decades, in part because insurers built their business models around these unsustainable subsidies, then cut and ran when the largess dried up.

Congress shares the chutzpah award, however, for trying to wrap itself in the cloak of free markets while trashing efforts to require competitive bidding for both private lab services and durable medical equipment such as wheelchairs. When it comes to slashing subsidies for insurance companies, Congress loves markets. When it comes to ending high-cost sweetheart deals for a handful of equipment companies, not so much.

Then, there is the doctor fix, which set off this whole hullaballoo. Last century, Medpac, an independent body that advises Congress on Medicare, recommended that physician reimbursement rates be trimmed. Each year or so, Congress dutifully bows to pressure from the doctor lobby and effectively freezes, rather than cuts, physician payments. This year, the reduction was supposed to be 10.6 percent, mostly because prior cuts had been repeatedly put off. When this comes up again in 2010, the docs will be in line for a 20 percent cut in payments. Care to guess how that will come out?

This fracas shows just how hard it is to do anything to control Medicare costs. These ballooning expenses are the biggest single risk to the nation’s long-term fiscal sustainability and, thus, a critical driver of tax policy over the next decades. Yet, Washington is not willing to reduce payments, or even encourage a tiny bit of price competition, for providers. And it took a huge battle to trim subsidies for Medicare managed care, which has become a honey pot for private insurers, especially the four companies that dominate the market.

And remember, all of this blood was spilled over payments to docs, equipment suppliers, and insurance companies, not patients. Just imagine what will happen when Washington tries, as it inevitably must, to tell seniors that Medicare will no longer pay for tests and treatments they want but which have no proven medical benefits. That, I promise you, will be no dance contest.

Economists Grade McCain On the Curve

Howard Gleckman — Tue, 15 Jul 2008 12:26:27 -0400

I turned in my PhD dissertation just in time. I can’t believe I’m going to be a doctor of public finance. My paper: An Alternative Tax System in the McCain Administration. It is a detailed description and macroeconomic analysis of John McCain’s plan to give taxpayers a choice of paying under the current system or through a much simpler and more efficient option.

What Would It Cost to Repeal the Corporate Income Tax?

Howard Gleckman — Fri, 11 Jul 2008 08:00:00 -0400

John Endean raised an intriguing idea the other day in response to my blog on whether business executives would be willing to give up targeted tax breaks in return for a lower corporate rate, as John McCain has suggested.

How the Budget Baseline Favors Spending: Continued

Rudy Penner — Thu, 10 Jul 2008 13:28:24 -0400

My blog on “How the Budget Baseline Favors Spending” stimulated numerous thoughtful comments. Some implied that my proposal would reward those who wish to make the Bush tax cuts permanent and ignore the fact that dubious accounting was used to get them passed in the first place. Those arguing this point did not pay sufficient attention to my last paragraph which implied that baseline reform would have to await the disposition of the Bush cuts. Further, I alluded to the possibility that whatever portions of the Bush policy are extended, the extension will again be temporary, thus making it difficult to finally settle the point.

Deficit Hawk Redux: Can McCain Balance the Budget by 2013?

Howard Gleckman — Tue, 08 Jul 2008 12:43:09 -0400

Unlike many bloggers, I am not going to bash John McCain’s renewed interest in balancing the budget. It is nice to see his on-and-off love affair with fiscal responsibility heating up again. There is just one problem with his vow to balance the budget by 2013. He can’t do it. Or, to be more precise, he can’t do it while extending the Bush tax cuts, cutting other taxes of his own, and maintaining a costly military presence in Iraq.

Does Business Really Want Low Tax Rates?

Howard Gleckman — Thu, 03 Jul 2008 08:00:00 -0400

The Wall Street Journal editorial page ran one of its favorite tables the other day, purporting to show how uncompetitive the U.S. corporate tax regime is with the rest of the developed world. The chart shows that, at nearly 40%, combined state and federal statutory rates here are far higher than the average of the countries in the OECD.

How the Budget Baseline Favors Spending

Rudy Penner — Wed, 02 Jul 2008 18:27:17 -0400

The Congressional Budget Office’s expenditure and revenue baseline is supposed to illustrate the budget implications of extending current policy. Few may care how the baseline is actually constructed, but since all policy changes are measured “from the baseline,” the arcane definitions that describe current policy can have a profound effect on Congressional decisions.

Sovereign Wealth Funds and Taxes

Howard Gleckman — Tue, 01 Jul 2008 18:22:43 -0400

Lots of buzz lately about sovereign wealth funds—those huge investment pools run by foreign governments that are becoming an increasingly important source of capital for U.S. companies. The Wall Street Journal’s Michael Phillips reports that foreign investors bought nearly $1 trillion in U.S. securities in 2007. And a small but growing share was acquired by sovereign wealth funds operated by dozens of countries, including China and the oil-soaked nations of the Middle East.

Who Really Pays Taxes?

Bob Williams — Thu, 26 Jun 2008 09:21:21 -0400

Less than an hour after Howard Gleckman posted a blog entry on the presidential candidates’ tax plans, a question came in about TPC’s finding that Senator Obama’s plan would increase taxes of a low-income elderly couple by $150. How, the commenter asked, could that happen if Obama said he’d eliminate taxes for elderly households with income under $50,000?

Obama and Social Security: Where’s the Beef?

Howard Gleckman — Tue, 24 Jun 2008 18:08:21 -0400

Barack Obama has a plan to fix Social Security. Or does he? Obama does have a vague proposal to raise payroll taxes for workers making more than $250,000. But there is a lot less to it than meets the eye, and Obama has left some hugely important questions unanswered.

An Upcoming Tax Reform Program

Howard Gleckman — Sat, 21 Jun 2008 12:00:00 -0400

I'll be moderating what should be an interesting discussion on fundamental tax reform at the New America Foundation on Tuesday. Other panelists will be New America's Maya MacGuineas and Michael Lind, and Yale University's Mike Graetz, who has designed a new Value Added Tax. If you’d like to join us, sign up at NAF's website.

What the Obama and McCain Plans Would Mean for Real Taxpayers

Howard Gleckman — Fri, 20 Jun 2008 16:03:40 -0400

How will ordinary families be affected by the tax plans of John McCain and Barack Obama? To get some answers, I asked Greg Leiserson, TPC’s crack modeler, to develop some examples.

The results mostly track what we already know—that McCain would cut taxes somewhat for nearly all, and a lot for the very wealthy, and Obama would cut taxes substantially for low- and moderate-income families and raise them dramatically for those in the upper brackets. But there are also some surprises.

Before I look at how the tax cuts would work for some typical families, keep in mind that TPC allocates a share of any changes in corporate taxes to individuals. Thus, their tax liability not only includes what happens to their income taxes, but also to their share of corporate taxes. Economists do this since companies don’t actually pay tax, the people who own the companies do. (Workers pay some share too, but since no one can agree on how much, TPC allocates all the tax to capital).

With that out of the way, here is what the numbers look like:

A single mom, with one child, making $15,000-a-year (in adjusted gross income) would get a $17 tax cut from the McCain plan, but see a $500 reduction from Obama, thanks to his new work credit.

A newly-married young couple with no kids, making a combined income of $50,000, would get a $36 tax cut from McCain, but a tax reduction of about $1000 from Obama. The big difference again: Obama’s work credit.

By contrast, think about the classic suburban 1950s sitcom family, with two kids but only one wage earner, who makes $75,000. Ward and June Cleaver would do a bit better under McCain, who would cut their taxes by $800, while Obama would trim their taxes by only about $500. McCain’s increased dependent exemption for Wally and the Beave trumps Obama’s work credit.

Now, let’s look at a two-lawyer family, making $200,000, with one child. McCain would give them a tax cut of roughly $7000, while Obama would trim their taxes by about $5000. The big reason: each candidate would patch the Alternative Minimum Tax.

A married baseball player who takes home $2 million and has one child might want to go to bat for McCain, who would give him a tax cut of more than $30,000. Obama would raise his taxes by $135,000. Talk about getting one in the ear.

For seniors, the pattern is a bit more surprising, since Obama has been touting his tax cuts for the elderly. Obama would give an unmarried senior making $35,000 a tax cut of $3000, which would wipe out her tax bill. McCain would give her a tax cut of about $250.

But now let’s look at that her neighbor, who makes $75,000 from her Social Security, pension, and other income. Obama would actually raise her taxes by about $600, while McCain would give her a $600 tax cut.

The same thing would happen to a very poor elderly couple making just $10,000. Obama would raise their taxes by $150, while McCain would cut them by about $170.

Of course, these are all averages. Some families might benefit more and others less. But this should give you a pretty good idea of the winners and losers.

McCain’s Disappearing Corporate Tax Reform

Howard Gleckman — Thu, 19 Jun 2008 18:08:45 -0400

Johnny, we hardly new ye.

John McCain’s ambitious plan to reform corporate taxes is disappearing faster than the Washington National's chances to win the national league pennant. What once had the makings of a provocative and potentially beneficial idea is morphing into a gimmicky mess.

Earlier his spring, McCain was talking about allowing companies to expense all their capital investments in the year they are made. This would eliminate many of the timing-related issues that make corporate taxes so complicated. It might even have become the first step towards replacing the income tax with a cash-flow levy. In such a system—a version of a Value Added Tax—companies would subtract their costs of goods from revenues and pay tax on the difference.

Back then, McCain had not yet answered one big question: What would happen to the tax deduction companies take for their interest payments? In any sensible expensing scheme, interest could no longer be tax deductible. If it were, businesses would become huge tax shelters.

Now that he’s started to answer this and other questions, his idea is getting worse. In his revised plan, which staffers have described to TPC, expensing would be limited only to short-lived property—equipment like cars and computers--now depreciated over five years or less. The proposal would be temporary, and would expire after five years. Interest payments would be taxable, but only if used to finance specific short-lived investments.

Yuck. Speeding up a deduction that you could take in a couple of years anyway is not much of a tax break. Making the proposal temporary just creates messy new timing issues—and would threaten to become yet another tax “extender” that is part of the annual Washington theater. And tying the interest deduction to the purchase of specific property will surely create endless opportunities to game the system. This will bring joy to the hearts of investment bankers and tax lawyers, but not to the rest of us.

The best that can be said about McCain's latest version is that perhaps it is an effort to shove the tip of the camel’s nose under the proverbial tent: Start with this and get more ambitious later. But that's a reach. Don’t get me wrong, McCain’s initial proposal had its problems, but it was intriguing, potentially far-reaching, and worthy of debate in a presidential campaign. This version will fall into the dust-heap of forgotten ideas. There was a brief moment when I thought we were going to have a serious tax reform debate in this campaign. I should have known better.

Off Base: How McCain and Obama Hide Trillions in Debt

Howard Gleckman — Tue, 17 Jun 2008 15:03:28 -0400

Barack Obama’s tax plan will either raise $262 billion over the next 10 years or increase the national debt by $2.7 trillion. John McCain would add either $615 billion or $3.6 trillion to the debt.

What’s going on? Don’t everyone turn your computer off at once, but we need to talk about budget baselines.

There is nothing more esoteric, but Obama and McCain have made them hugely important. Trillions of dollars important. In fact, the only way either candidate can establish even a nanobit of fiscal credibility is by dramatically reframing the deficit discussion.

Both want to convince us that the Bush tax cuts will go on forever, even though they are due to expire in 2010, and that the Alternative Minimum Tax mess has already been fixed, although a permanent solution is nowhere in sight. With these helpful assumptions, their trillions of dollars in tax cuts look modest. Both candidates can make it appear as if they are merely moving around a bit of loose change, rather than massively increasing their grandchildren’s debt.

This is nothing more than a fiscal parlor trick. McCain, at least, can argue that he has supported the Bush tax cuts—well, he supported them after he opposed them. Obama has voted time and again against extending them and calls them irresponsible. What is likely to be a strongly Democratic Congress will never vote to sustain them as is. Yet, both Obama and McCain would like us to believe these tax cuts are cast in stone—the fiscal Ten Commandments, if you will—even as they propose to change them.

Neither seems to have noticed that Washington routinely overhauls the tax law every decade or so. When it comes to taxes, change is the status quo.

There is an easy way to cut through this palaver. Forget the baseline. Just think about three numbers: How much would either candidate collect in taxes as a share of the Gross Domestic Product? How much is government likely to spend? And, how much would they have to cut that spending to keep the national debt from ballooning.

TPC estimates that in 2013, Obama would collect revenues of 18.2 percent of GDP. McCain would bring in about 17.8 percent. Spending that year would be about 19.5 percent, according to the Congressional Budget Office, assuming the Iraq war will be winding down.

Thus, Obama would have to cut spending by 1.3% of GDP or $230 billion, to balance the budget in 2013. McCain must find 1.7% of GDP, roughly $300 billion. For context, Bush and the Congress have been battling for years over budget cuts one-tenth that size.

I await word on the candidates’ additional spending cuts. Obama has embraced costly new initiatives for infrastructure, education, health care, and energy, but said little about exactly where he’d cut spending. McCain vows to cut pork, which might get him 5% of what he needs. On the other hand, he is not likely to end the war any time soon.

Revised Estimates for the Candidates’ Tax Plans

Len Burman — Tue, 17 Jun 2008 11:20:16 -0400

We have updated our preliminary estimates of the revenue effects of the candidates’ tax plans. Our estimate for the ten-year revenue change compared with current law from Senator Obama’s plan is identical to that in our original study—a $2.7 trillion revenue loss. Our updated projection for Senator McCain’s plan shows a revenue loss of $3.6 trillion instead of $3.7 trillion. With interest costs, Obama would add $3.3 trillion to the national debt, while McCain would increase the debt by $4.3 trillion.

Our new estimates also show that if current policy is extended beyond 2010—the way both candidates prefer to describe their plans—Obama would raise $262 billion in tax revenues and Senator McCain’s would reduce revenues by $615 billion. Our initial estimates understated the revenue loss for McCain and overstated the revenue gain for Obama against this baseline. We also made minor revisions to some other estimates.

Note that our estimates for the candidates’ plans reflect some of the ways people change their behavior when tax laws change. For example, some people can be expected to switch from taxable to tax-exempt bonds when rates increase. In the past, we estimated only the static effect of tax changes. Static scoring had the virtue of simplicity—most estimates came straight from our tax model—but the disadvantage that they were not strictly comparable with official revenue estimates, which do account for behavioral responses. We plan to reexamine our assumptions and methodology before we release the next update of our paper on the candidates’ tax plans. We also expect the next version to include an analysis of both candidates’ health proposals and more analysis of proposals we left out of our original version: Obama’s stated plan to increase Social Security taxes on those earning over $250,000 and McCain’s proposal to allow taxpayers to elect a simplified alternative tax system.

Clarification on Senator Obama's Social Security plans

Len Burman — Sun, 15 Jun 2008 13:31:36 -0400

We've heard from the Obama campaign about our blog post on Senator Obama's Social Security tax increase on people earning more than $250,000. The campaign clarified that the threshold would be $250,000, but Senator Obama has not specified what the rate would be, when it would take effect, whether it would apply to employers, employees, or both, or what the tax base would be.

Senator Obama Feeds Social Security a Donut Hole

Len Burman — Fri, 13 Jun 2008 17:13:01 -0400

In preparing our analysis of the candidates’ tax plans, we sent descriptions to each campaign for comment/clarification/correction. Senator Obama’s staff asked us not to include his reported support for a Social Security tax on earnings above $200,000 or $250,000, saying that there was no specific proposal. So we left the Social Security proposal out of our core analysis. We also left out Senator McCain’s proposal for an optional alternative tax system on similar grounds. We did discuss these non-proposals in two sidebars in our analysis.

Obama and the Economy: Fighting The Wrong War

Howard Gleckman — Thu, 12 Jun 2008 17:03:37 -0400

Barack Obama looks at the U.S. economy and worries about recession—which he would cure with a $50 billion stimulus bill. Increasingly, Fed Chairman Ben Bernanke looks at the same economy and sees inflation—which he would treat by raising interest rates.

TPC Looks at the Obama and McCain Tax Plans

Howard Gleckman — Wed, 11 Jun 2008 12:34:35 -0400

In the first detailed analysis of the Barack Obama and John McCain tax plans, the Tax Policy Center has run their proposals through the Big Computer and discovered that their schemes are, well, painfully predictable. Each would raise the national debt by trillions of dollars. Obama would use the money to provide modest tax cuts to low- and moderate-income people while imposing stiff tax hikes on the very wealthy. McCain would cut taxes a bit for the working-class and a lot for the rich.

High Wire and Hospital: Two Books You Should Read

Howard Gleckman — Tue, 10 Jun 2008 11:38:32 -0400

I've just finished two terrific new books: High Wire: The Precarious Financial Lives of American Families by long-time LA Times reporter Peter Gosselin, and Hospital by Julie Salamon. In quite different ways, each illuminates some of the critical social policy issues of our time.

A New Annuity for 401(k)s

Howard Gleckman — Thu, 05 Jun 2008 16:12:02 -0400

As 401(k) plans and other defined contribution savings vehicles have become more popular in recent years, retirement experts have become increasingly worried about how workers can make these funds literally last a lifetime. Too often, retirees withdraw the money too quickly and end up outliving their savings or, worse, take the whole pot of cash and go off to buy that bass boat they’ve always wanted.

What Will Obama Do with a Cap and Trade Windfall?

Howard Gleckman — Tue, 03 Jun 2008 17:00:42 -0400

Interesting confluence of events: Barack Obama is about to wrap up the Democratic Presidential nomination and the Senate has begun debating a major plan to cap carbon emissions—an idea Obama strongly supports.

How The Rich Avoid Paying Taxes

Howard Gleckman — Thu, 29 May 2008 14:59:03 -0400

It is a nice object lesson in how a couple of obscure changes in the tax law can save a few people a lot of money. The IRS has reported that the number of those earning $200,000 or more who paid no taxes rose sharply in 2005. More than 7,300 of these worthies avoided U.S. income tax entirely, two-and-a-half times the year before. About 85,000 paid worldwide taxes of less than 10% of their income.

Tax Extenders and Fiscal Responsibility

Howard Gleckman — Thu, 29 May 2008 11:18:48 -0400

For another take on my debate with George Yin on whether temporary tax breaks are a good idea George) or not (me), take a look at economistmom, the new blog by former House Ways & Means Committee chief economist Diane Lim Rogers. She’s got a great anecdote about a conversation with a committee member during a late night markup of an extender bill.

Paul Ryan’s Fiscal Roadmap

Howard Gleckman — Tue, 27 May 2008 14:34:30 -0400

Kudos to Rep. Paul Ryan (R-WI), the senior Republican on the House Budget Committee, for proposing an ambitious plan aimed at bringing government spending under control over the next 75 years. Actually, Ryan would do even more than that. He’d also restructure the tax code, Social Security, Medicare, and Medicaid.

Temporary Laws and Fiscal Restraint

George Yin — Tue, 27 May 2008 10:40:33 -0400

Howard Gleckman continues to think that temporary tax cuts are no better than permanent ones from the standpoint of enhancing political accountability and fiscal restraint (“Tax Extenders and Fiscal Restraint,” May 22, 2008). So here’s some data.

The Supreme Court and Muni Bonds

KimRueben — Fri, 23 May 2008 08:25:40 -0400

On Monday, the Supreme Court ruled that states may offer special tax breaks to residents for investing in municipal bonds issued by them and local governments within the state. The 7-2 decision, in Kentucky Department of Revenue v. Davis was widely expected. But even if the Court wanted to bar states from preferring their own bonds over those from other jurisdictions, the current troubles of the $2.6 trillion municipal bond market probably made that impossible.

Tax Extenders and Fiscal Restraint

Howard Gleckman — Thu, 22 May 2008 14:24:06 -0400

It was good to hear from University of Virginia tax professor and former Joint Tax Committee boss George Yin. George argues that temporary tax cuts are a good idea because they force Congress to consider the costs and benefits of these measures before renewing them. This reckoning, he says, imposes more political accountability on the system, not less.

Temporary Laws, Political Accountability, and Fiscal Restraint

Guest Blogger — Wed, 21 May 2008 16:33:43 -0400

Howard Gleckman’s criticism of temporary legislation (“The Tax Extenders Ride Again,” May 20, 2008) overlooks the impact of Congressional budget rules. When such rules are considered, a change in law on a temporary (rather than permanent) basis increases political accountability and arguably enhances fiscal restraint.

The Tax Extenders Ride Again

Howard Gleckman — Tue, 20 May 2008 17:08:40 -0400

The other day, the House Ways & Means Committee routinely approved dozens and dozens of tax breaks. Hardly anyone even noticed.

Forget Death and Taxes, How About Health and Taxes?

Howard Gleckman — Thu, 15 May 2008 08:00:00 -0400

Like it or not, health care and taxes are inextricably linked in the U.S. The employer-sponsored health system that covers most of the non-elderly is largely built on nearly $200 billion in income tax breaks. The biggest: employer-sponsored insurance which is tax-free to workers. Perversely, this structure provides the biggest tax breaks to the highest income workers who get the most expensive plans.

Cap’n Trade: McCain Weighs In

Howard Gleckman — Tue, 13 May 2008 15:32:32 -0400

Yesterday, John McCain disclosed details of his plan to cut the use of fossil fuels—and thus greenhouse gases--through a cap and trade system of mandatory emissions reductions. As we have written, cap’n trade is not the name of a cheesy seafood restaurant. It is Washington-speak for a huge new tax on oil, gas, and coal. This is a good thing, but we ought to talk about it honestly.

The Farm Bill: Back to the Trough

Howard Gleckman — Thu, 08 May 2008 17:28:19 -0400

$451 million in tax breaks for timber companies. Ka-ching. $500 million for biodiesel. Ka-ching. $126 million for racehorse breeders. Ka-ching. $20 million for Aggie bonds. Ka-ching.

Cap’n Trade: Don’t Cut the Gas Tax, Raise It—A Lot

Howard Gleckman — Tue, 06 May 2008 17:51:42 -0400

Before you get the idea that a big increase in energy taxes is just the latest raving of an elitist, inside-the-Beltway policy wonk, you might want to know that I’m not the only one who likes this idea. So do John McCain, Hillary Clinton, and Barack Obama.

Clintonomics on the Gas Tax Holiday

Len Burman — Mon, 05 May 2008 11:14:54 -0400

Senator Clinton has taken economists to task for our universal opposition to a gas tax holiday. Both theory and evidence tell us that suspending the tax temporarily would provide little relief to consumers while further enriching big oil.

We’re in the Money but What Will We Do with It?

Bob Williams — Mon, 05 May 2008 08:14:18 -0400

With unusual speed, the IRS sent out the first tranche of $100 billion in recovery rebates last Monday. It took Congress and the President less than a month to enact the Economic Stimulus Act of 2008 and then just 62 days for the IRS to begin getting the money into people's hands. The question now is what will they do with the windfall, which for couples will be as much as $1,200 plus $300 per child. The answer may disappoint those who are hoping a new burst of consumer spending will give the lagging economy a needed boost.

The Gas Tax Holiday: Can the States Do Any Better?

KimRueben — Fri, 02 May 2008 12:04:59 -0400

While TaxVox and others have disclosed the folly of a federal tax holiday, some have suggested that temporary state gas tax relief might work better. Some New York State legislators are already pushing for such a plan. But before cash-strapped states jump on the bandwagon, they might consider how a previous experiment in Illinois and Indiana worked out. In 2000, Indiana announced that it would be suspending its 5 percent gasoline sales tax for 120 days beginning July 1. In response, Illinois also suspended its levy for six months that July.. Quaint as it seems today, the changes were spurred by a spring spike in Midwest gas prices to (gasp) $2.00 – a level drivers would now gladly embrace.

A Primer on the Gas Tax Holiday

Eric Toder — Fri, 02 May 2008 10:15:32 -0400

If a gas tax holiday drives the price down by the full amount of the tax (18.4 cents), the average driver would save about $28 ($27.67) between June 1 and September 1. But we think the price would fall by only a small fraction of the 18.4 cents tax – so instead of $28, the average driver might save $5 to $10.

Mission Accomplished: The Tax-Free War

Howard Gleckman — Thu, 01 May 2008 16:51:42 -0400

It is the fifth anniversary of President Bush’s dramatic landing on the deck of the aircraft carrier USS Abraham Lincoln where, in front of that massive “Mission Accomplished” banner, he declared “major combat operations in Iraq have ended.” They have not, of course. And it has me thinking about how those of us who do not have loved ones in combat operations are sacrificing nothing for this conflict.

Capital Gains Mythology

Eric Toder — Tue, 29 Apr 2008 17:41:04 -0400

Much of the reaction to the April 16 Democratic Presidential debate was directed at the moderators for focusing on character and perception rather than policy. But issues got mangled as well—not only by the candidates, but by moderator Charles Gibson. While questioning Barack Obama about his proposal to raise the capital gains tax, Gibson claimed that when the rate has been cut, government took in more money, but when the tax was increased revenue fell. Although this argument warms the hearts of the Wall Street Journal editorial page, the implication that capital gains tax rate cuts raise revenues is not supported by the evidence.

Clinton’s Gas Tax Holiday: Chasing Her Tail

Howard Gleckman — Tue, 29 Apr 2008 16:52:54 -0400

Props to Barack Obama for resisting the siren call for a summer gas tax holiday. In contrast, Hillary Clinton has clambered aboard John McCain’s free-lunch bandwagon, vowing to support the gas tax cut he first proposed a couple of weeks ago. Even worse, she’s now tied it to an energy company windfall profits tax so, as she says, oil companies would “pay their fair share to help us solve the problems at the pump.”

Stop Them Before They Spend Again: Budget Veterans Look for a New Entitlement Fix

Howard Gleckman — Thu, 24 Apr 2008 17:10:13 -0400

There are few things more frustrating in life than being a budget hawk. You spend your days predicting dire consequences that never quite come to pass, trying to convince voters that their government can’t keep expanding popular programs without paying for them, and hectoring politicians into making votes that would be political suicide. Like Cassandra of Greek myth, you have the ability to foretell the future, but suffer the curse of being unable to change it.

McCain's X-Factor

Howard Gleckman — Tue, 22 Apr 2008 16:36:11 -0400

While most observers are focused on John McCain’s proposed summer gas tax holiday, they have missed a much bigger idea from GOP’s likely presidential nominee: A massive tax reform—but one that, at least as it stands now, would be a huge windfall for business.

Response to "Scoring McCain's Tax Proposals" by the McCain Campaign

Guest Blogger — Sun, 20 Apr 2008 17:11:35 -0400

On April 17, the Tax Policy Center posted “Scoring McCain’s Tax Proposals”. Although I remain a fan of efforts by organizations like the Tax Policy Center to analyze taxation issues, the analysis is misleading on the whole and wrong in some particulars.

Read Their Lips: Clinton and Obama Take the Pledge

Howard Gleckman — Thu, 17 Apr 2008 14:18:49 -0400

In their debate last night, Hillary Clinton and Barack Obama wandered deep into George H.W. Bush land by pledging never to raise taxes on “middle-income” taxpayers making less than $250,000.

Scoring McCain’s Tax Proposals

Len Burman — Thu, 17 Apr 2008 09:26:53 -0400

Senator McCain wants to make government much, much smaller. His specifics on how are sketchy—eliminate earmarks, programs that don’t work, waste… But his tax day speech gives us an idea of how much he wants to shrink the government. A lot. And even more than when we last blogged on the subject back in February.

What Were They Thinking???

Len Burman — Tue, 15 Apr 2008 18:27:12 -0400

Senator McCain proposed today to suspend the 18.4 cents per gallon federal excise tax on gasoline between Memorial Day and Labor Day this year. For a moment, forget about whether encouraging fossil fuel burning makes sense during a time of global warming, whether we should raid the highway trust fund when bridges are collapsing for lack of maintenance, or the disconnect between the proposal to cut gasoline taxes and the candidates’ endorsement of “cap-and-trade” limits that would raise gasoline prices.

One Cheer for the Income Tax

Howard Gleckman — Tue, 15 Apr 2008 18:04:45 -0400

To celebrate April 15, TPC director Len Burman argued yesterday on TaxVox that today’s income tax “is not all bad” and that “we could do a lot worse.” Well, it may not be all bad, but it is pretty awful. And while we could do worse, we could also do a lot better.

Two Cheers for the Income Tax

Len Burman — Mon, 14 Apr 2008 18:36:01 -0400

Like most Americans, I hate preparing my income tax return. And, as a tax policy expert, I know that our current tax system is deeply flawed. But it's not all bad. It raises a lot of revenue ($1.1 trillion in 2007) and, like it or not, we have to pay for government. Income taxes are also progressive, raising the lion's share from those most able to pay, and little or nothing from those at the bottom. Sure, we could and should make it simpler and fairer, but we could also do a lot worse.

The financial burden of the income tax on most people is pretty bearable. Most taxpayers pay more in payroll (FICA) taxes than in income taxes. For example, the median income of married couples in 2007 was about $74,000. (That is, half of couples earned more and half less.) Their average income tax bill was $3,400, or less than five percent of income. The median-income single taxpayer earned $22,500) and paid about $610, or three percent.

The income tax also helps millions of working families at the bottom. The earned income tax credit (EITC) augments the meager wages of low earners and encourages them to work. Indeed, the EITC lifts millions of children out of poverty.

People with high incomes paid a lot more. The top 40 percent pay most of the income tax. The top 10 percent pays 72 percent. That seems like a lot, but they earn nearly half of all income. Their income tax amounts to about 16 percent of income.

They should pay even more—their incomes have exploded while middle-income households have struggled to get ahead, and they have gotten huge tax cuts since 2001. But, even after the tax cuts, the income tax is highly progressive.

That said, there are huge flaws in the income tax. Some high-income people pay peanuts in tax because of gaping loopholes. Meanwhile, middle- and even low-income people are so daunted by the unnecessary complexity that most pay professional preparers to fill out their tax returns.

The income tax needs fixing and proposals for doing just that are abundant. But there are also proposals—well funded by millionaires who think they're over-taxed—that would jettison the income tax in favor of a supposedly simpler system.

The so-called “Fair Tax,” famously embraced by Governor Huckabee in his run for the White House, would replace the income tax with a national sales tax. Its proponents argue that just about everyone would pay lower taxes under this system, apparently assuming that most Americans are not bright enough to figure out that this means that the tax would not raise anywhere near enough money to finance the government. In fact, at rates high enough to pay for the government—at least 34 percent, according to President Bush's tax reform panel—it would represent a huge tax increase on the middle class and (surprise) a huge tax cut for millionaires (who spend only a fraction of their incomes).

The flat tax, Steve Forbes's crusade, would similarly bestow massive tax cuts on the wealthy. Fred Thompson proposed allowing people the option of paying tax under a simpler alternative tax system. People would only make that choice if it meant lower taxes, and the people who'd get the biggest tax cuts would be the millionaires. This bit of fiscal magic would add $6 trillion to our burgeoning national debt over the next 10 years.

Senator McCain's proposal, which his campaign admits is a first step toward a consumption tax, would do nearly as much damage to fiscal finances as Senator Thompson's tax giveaway.

Ironically, the Democratic candidates would unwittingly provide ammunition for the income tax bashers by adding a raft of new credits and deductions. Those breaks may make great sound bites on the campaign trail, but they'd make the income tax more complicated and contribute to the perception that it is unfair.

The solution is not to ditch the income tax, but to fix it. Rein in the propensity of politicians of both parties to use it to grant favors to particular constituencies. And make sure it raises enough revenue to pay our bills so we don't bequeath bigger tax headaches to our children.

Why Congress' Housing Fix Won't Help Steve and Laura

Howard Gleckman — Thu, 10 Apr 2008 16:42:25 -0400

The Washington pols who are pushing housing legislation should meet my friends Steve and Laura. They are a 30-something couple with a two-year old daughter, and they have been waiting for years to buy a house.

McCain: Grasping for the Mantle of Change

Howard Gleckman — Mon, 07 Apr 2008 18:08:51 -0400

I spent about 90 minutes this afternoon interviewing John McCain's chief economic adviser, Doug Holtz-Eakin. He laid out what would be a powerfully ambitious domestic agenda for a President McCain, including big upfront initiatives on climate change and Social Security reform. But he also set the stage for what would be an existential battle between the parties over taxes and spending.

The Senate Defaults on a Foreclosure Bill

Howard Gleckman — Thu, 03 Apr 2008 15:32:09 -0400

Why is it that the biggest problems always seem to encourage the worst possible solutions? The latest case in point: The Senate's housing bill, grandly titled "The Foreclosure Prevention Act of 2008."

The Paulson Plan: Lots of Details, but Little Focus

Howard Gleckman — Tue, 01 Apr 2008 18:54:45 -0400

What to make of Treasury Secretary Hank Paulson's plan to rewrite regulation of the financial services industry?

A Choice, Not an Echo

Howard Gleckman — Thu, 27 Mar 2008 19:58:42 -0400

If we can get past all the noise about Barack Obama’s minister, Hillary Clinton’s 11-year-old recollection of an airport tarmac, and John McCain’s stumble over which Iraqi gunmen are backed by the Iranians, voters will actually have real choices this November. If you don’t believe it, think about how they’d manage today’s economy.

Carbon Taxes: Do you want to cut consumption or raise money?

Howard Gleckman — Tue, 25 Mar 2008 16:01:50 -0400

Don’t expect carbon taxes to both dramatically reduce greenhouse gasses and serve as a cash cow for government. They might succeed at one or the other, but not both. That’s the argument Monica Prasad makes in a provocative article in today’s New York Times.

"A Game With Which I am Not Familiar"

Howard Gleckman — Thu, 20 Mar 2008 14:50:49 -0400

When a young Jack Nicklaus won the 1965 Master's, golf legend Bobby Jones said he "was playing a game with which I am not familiar." I have the same feeling about the financial markets today.

The Credit Crisis and the States: Only Getting Worse

Howard Gleckman — Thu, 13 Mar 2008 17:16:51 -0400

think I need a drink. Yesterday at TPC, a panel of experts looked at what the credit mess means for state and local governments. The answer is: Nothing good. I felt like I was watching the final minutes of the Super Bowl with a room full of New England Patriots fans.

Health Care Tax Credits: Not So Fast

Howard Gleckman — Tue, 11 Mar 2008 16:15:51 -0400

Tax credits for buying health insurance are all the rage. John McCain loves them. So does Hillary Clinton. Barack Obama says he prefers to help people buy coverage with “income-related subsidies,” but these could easily morph into credits as well.

The Rich are Different

Len Burman — Fri, 07 Mar 2008 11:52:12 -0500

F. Scott Fitzgerald: "The very rich are different from you and me." Ernest Hemingway: "Yes, they have more money." The statisticians at the IRS quietly updated their fascinating data on the richest 400 Americans in response to a Congressional request. The Wall Street Journal's Tom Herman picked it up and published the tables, which we have posted on the Tax Facts website. [Table 1, Table 2, Table 3]

AMT Redux

Howard Gleckman — Thu, 06 Mar 2008 15:12:33 -0500

After a brief winter break, the AMT wars have resumed. By next week, the House will pass a fiscal 2009 budget that, among other things, would extend the annual Alternative Minimum Tax patch for another year. The House Budget Committee projects this would keep 20 million mostly middle class taxpayers off the dreaded levy. But, as it did last year, the House will also insist that the $62 billion fix be paid for with offsetting tax hikes.

Is the Iraq War Ruining the U.S. Economy?

Howard Gleckman — Tue, 04 Mar 2008 14:26:01 -0500

The political Left claims the war in Iraq is ruining the U.S. economy. At the very least, they insist, we would be using the money that is supporting the occupation for more important domestic priorities, such as reforming health care. At worst, they insist, the war is to blame for current economic slump.

Health Insurance Tax Breaks: What Comes Next?

Howard Gleckman — Fri, 29 Feb 2008 18:21:53 -0500

The tax break for employee-sponsored health insurance is the Rodney Dangerfield of the Internal Revenue Code. It gets absolutely no respect.

The Medicare Crunch: Do We Blame the Boomers or Health Costs?

Howard Gleckman — Tue, 26 Feb 2008 18:28:10 -0500

For years, conventional wisdom in Washington said the nation's long-term fiscal crisis is being driven by the aging of the Baby Boomers and their impact on entitlements, such as Social Security and, especially, Medicare and Medicaid.

On Taxes, McCain Calls Bush and Raises, Big Time

Len Burman — Mon, 25 Feb 2008 11:00:41 -0500

Today's Washington Post takes Senator John McCain to task for promising unsustainable tax cuts, including making permanent President Bush's tax cuts, repealing the AMT, making permanent the research and experimentation tax credit, cutting the top corporate tax rate from 35 to 25 percent, and allowing businesses to immediately write off all capital investments (rather than depreciating them over time). He has also proposed to require a super-majority vote in Congress for any tax increases. (Last week, TaxVox raised its own questions about how tough it would be for McCain to keep his tax cut promises.)

Seven Questions for Hillary

Howard Gleckman — Thu, 21 Feb 2008 14:26:46 -0500

Hillary Clinton has an uphill struggle to win the Democratic nomination for President. But she is still battling, so I have a few questions for her, as I've had for John McCain and Barack Obama.

Risky Business: McCain Vows "No New Taxes."

Howard Gleckman — Tue, 19 Feb 2008 16:41:49 -0500

John McCain now says "no new taxes." It may be a great way to play to a still-skeptical GOP base, but it will be a hard pledge for President McCain to keep. To see how tough, just take a look at his own health care plan.

Barack-onomics: What is It Really?

Howard Gleckman — Thu, 14 Feb 2008 15:56:17 -0500

After convincing primary wins in Maryland and Virginia on Feb. 12, Barack Obama has the momentum in the Democratic race for president, so, it seems like a good idea to ask some important questions about his fiscal policy agenda.

Tax Policy for Candidates -- and for the Rest of Us

Bob Williams — Wed, 13 Feb 2008 13:11:48 -0500

Now that the presidential primary season is heading into the homestretch, the candidates may begin to focus on important issues they’ll face if they are actually elected. With that hope, TPC has put together an online briefing book on the U.S. tax system—with lots of background information on tax and budget policy along with options for reform, both incremental and sweeping.

Time to Get Serious About the Bush Tax Cuts

Howard Gleckman — Tue, 12 Feb 2008 11:19:26 -0500

Maybe it's time to have a grown-up discussion about the Bush tax cuts. Something big will happen to them before they expire in 2010. But they are not going to be made permanent. Nor will they be allowed to completely expire. For their own reasons, both political parties continue to argue over these absolutes, but this debate is silly and leads nowhere.

Getting Saving Incentives Right

Ben Harris — Mon, 11 Feb 2008 09:55:48 -0500

The Bush Administration's 2009 budget, released last week, contained a proposal to reform the tax incentives aimed at encouraging additional retirement saving. The Administration's plan calls for the consolidation of the various types of Individual Retirement Accounts (IRAs) into a single Retirement Savings Account (RSA). RSAs would have the characteristics of a Roth IRA—that is, once contributions are made to the account, both the account balance and eventual distributions would never be taxed.

Stimulus: Washington's Gift to the Middle Class

Howard Gleckman — Fri, 08 Feb 2008 14:59:56 -0500

After Congress agreed to its $169 billion stimulus package last night, a happy House Speaker Nancy Pelosi (D-Cal.) boasted, "What has passed the Congress in record time is a gift to the middle class and those who aspire to it in our country."

Who is the Real McCain?

Howard Gleckman — Wed, 06 Feb 2008 08:47:40 -0500

Congratulations to John McCain, whose strong Super Tuesday showing made him the clear frontrunner for the GOP presidential nomination. But who is the Real McCain? Is he the sometimes ornery contrarian who bucked his party on issues such as campaign finance reform, or the establishment Republican who, since 2004, has been a faithful supporter of President Bush?

The Bush Administration's First Green Budget

Len Burman — Mon, 04 Feb 2008 14:58:12 -0500

The Administration released its FY2009 budget today. To save paper, OMB limited the number of printed copies, but Senate Budget Committee chairman, Kent Conrad (D-ND) couldn't resist quipping that the Administration "ran out of red ink."

Washington's Business Stimulus: Off Target

Howard Gleckman — Thu, 31 Jan 2008 17:56:59 -0500

While everyone has focused on the individual elements of the stimulus bills working their way through Congress, few have paid much attention to the business provisions. They should, because they could turn out to be an awfully big waste of money.

California Health Care Reform: RIP?

KimRueben — Tue, 29 Jan 2008 18:20:22 -0500

California's health care reform may be the first victim of the economic downturn. Governor Arnold Schwarzenegger's ambitious $14.9 billion plan to reform the state's health insurance system has crashed, in part because it was unclear proposed funding sources would raise enough revenue to ensure the program's viability in the face of a deteriorating budget environment. The state is facing a $14.5 billion deficit.

The Stimulus and the Deficit

Howard Gleckman — Tue, 29 Jan 2008 17:07:05 -0500

Not to spoil the stimulus party or anything, but the budget deficit this year could well approach $500 billion.

Supply Side Leaps of Faith

Len Burman — Tue, 29 Jan 2008 14:48:00 -0500

Among all the magical tax cuts in supply siders' arsenal, one is believed to have almost magical powers—cutting capital gains taxes. Advocates take it as a matter of faith that cutting tax rates on profits from sales of assets spurs so much more selling that revenues must increase.