As anyone who has read much of my blog knows, I find it frustrating that many on the right wing of the Democratic party (and almost all of the Republican Party) recommend tax cuts like the elixirs hawked in small towns during the Gold Rush--the remedy for all fiscal ills. If there is a boom and a surplus, the right recommends tax cuts (for the rich, usually). If there is a bust and a deficit, what does the right recommend? Why, tax cuts for the rich, of course, sprinkled liberally with reduction in any programs intended to help the vulnerable and poor, and seasoned by words about "responsibility" and "accountability".
Here's one more piece of evidence: Chris Farrell's BusinessWeek Viewpoint, "Fight the deficit Monster with Tax Reform," Dec. 13, 2009. (Hat tip tax prof and Mike McIntyre)
Farrell starts with "daunting" numbers--the potential $12 trillion national debt level and the potential 10-year deficit of $9 trillion. Then he admits that much of that is a reflection of temporary measures, and that though interest has gone up, so has GDP, so that the average percent of the GDP paid out as interest will actually be lower than it was in the decade from 1985 to 1994 (when we were dealing with the huge Reagan tax cut).
But then he goes nutty, claiming that "simpler" tax rules can solve the problem. Now, "simpler" in the mouth of a right-winger tends to mean cutting programs that help the poor, increasing tax welfare for the big multinationals (especially Big Finance), and providing tax cuts for the rich (like zero capital gains taxation, etc.). What does Farrell mean? Hmmm. Let's analyse.
1. eliminate all or most tax credits, tax deductions, income phase-ins and phase-outs, exclusions and exemptions.
That might sound nice as a start. A little like Steve Forbes' plan to have everybody file a flat tax on a post card. But let's face it. The reason for a huge number of those exemptions, exclusions, phase-ins, credits, and deductions is to prevent the income tax from taking too big a bite out of the funds available to middle and low income taxpayers. The Earned Income Tax Credit is a tremendously important item for low income taxpayers at this time of recession. The personal exemption and standard deduction are calculated to try to ensure that every American can earn enough to cover bare necessities. The phase-outs help (though don't go far enougn) in preventing the wealthy from getting all the benefit.
Sure, there are deductions and credits that we should remove. We should eliminate the R&D credit, so that corporations aren't able to immediately get a full dollar of tax relief for each dollar of R&D expenditure--especially when it is Big Pharm just varying the formula on a patented medicine so that it can continue reaping ridiculously high charges for its patented medicines. But simplification is the wrong policy for reforming the tax code. Complex provisions aren't really such a problem for wealthy taxpayers and corporations, so simplification can primarily benefit lower and middle income taxpayers. Just arguing simplification, rather than the rationale for the particular item being "simplified" out of existence, is a foolish way to go about tax reform.
2. keep "important tax cuts from earlier in the decade" including "low rates on dividend and capital gains taxes"
Well, now Farrell is being more upfront with his agenda. He wants to retain the horribly expensive Bush tax cuts that primarily benefited the wealthy as a way of dealing with the deficit????? Surely he jests. Almost any tax professor will tell you that one of the best features of the base broadening 1986 tax reforms was elimination of the capital gains preference. The Bush tax cuts went in the wrong direction--they increased the preference (lowering the capital gains rate to zero percent on the first brackets and then 15%) and added dividends to the preference, making it even less likely that an adequate corporate and shareholder tax would be collected.
Farrell includes the Alternative Minimum Tax (AMT) in his group of simplifying suggestions, arguing again that it was "aimed at high-income taxpayers" but now "threatens increasing numbers of middle-income families." The AMT should be reformed, but not to repeal it. See many earlier articles here explaining how the AMT works and what kinds of reforms make sense. In fact, the main taxpayer groups that will be increasingly hit by the AMT are those with incomes well beyond the middle class--the $250,000 to $500,000 set. Probably Congress should just quit "patching" the AMT, so that it does its work, since Congress doesn't seem to have the courage to patch the regular tax to remove the too expensive tax cuts enacted during the Bush years.
3. Broaden the tax base and simplify the Code
Farrell's article is really poorly organized. He mentions again here all the phase-ins and outs, deductions and credits. But he names a few--like the child-care credit and employer-provided health insurance. Now I will agree wholeheartedly that there are a number of deductions and credits we could remove with impunity because they primarily constitute redistribution upwards to the wealthy through "reverse welfare" in the Code. But the child care credit isn't one of them, and energy conservation credits are not either. Nor is employer-provided health insurance--at least not until Congress enacts real reform (rather than the current giveaway to Big Insurance that it appears dead set on enacting).
What does Farrell suggest should be the guide for this effort to broaden the tax base? Why, Bush's 2005 Advisory Panel on Tax Reform. But that was REQUIRED to place off the table any consideration of undoing the ridiculous tax cuts that had been passed under the Bush regime. So that is not a very good starting off place--neither for simplification nor for real tax reform.
All in all, Farrell's piece seems yet another in the long line of cut taxes for the wealthy and cut out every bit of the New Deal that provide a decent baseline in terms of how the country cares for its sick, its downtrodden, its elderly citizens. "Expanding the revenue base" while retaining Bush's favoritism for the capital gains primarily enjoyed by the wealthy perpetuates the lopsided "haves and have-mores" thinking that marked the years of the Bush regime.
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