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October 15, 2012 11:42 AM Broaden the Base. Don’t Touch the Rates.

By Harold Pollack

Governor Romney has proposed cutting federal income tax rates by 20 percent, and paying for this by removing various loopholes and deductions. The math doesn’t add up, which is a problem. Even if the revenue numbers did work, “broaden the base, lower the rates” provides a seductive but poor guide to tax policy. The approach is appealing. It brings back memories of the 1986 tax reform, a high point of policy-wonk legislative excellence. In its time, that bill was a genuine triumph of bipartisan policymaking to improve tax policy. Every competent microeconomic student should be able to explain why the deadweight loss associated with taxes is reduced when one can impose low rates on a broad base of income.

Unfortunately, that approach provides a poor guide for today. The fruit is less ripe for the picking. Today’s marginal tax rates are lower than they were a quarter-century ago. Moreover, even if one managed to broaden the tax base, various loopholes and deductions for individuals and corporations would find their way back into the tax code. That’s exactly what happened to the 1986 tax reform. It was well-crafted as a piece of static policy. It was not well-designed to mobilize friendly constituencies or to construct institutional defenses that would make that worthy law politically sustainable.

Perhaps a transparent dollar cap on deductions–the most interesting policy idea Romney has proposed–would work better. Yet as Eric Patashnik’s terrific book Reforms at risk: What happens after major policy changes are enacted makes clear, the overall approach pursued in 1986 politically unravelled. The most likely outcome today would be to lower the rates, and then to gradually allow new tax breaks into the code, balloon the deficit, and frame political debate around the idea that marginal tax rates must be as low as possible.

As Tim Noah observes here, we need to raise taxes, not reform them. Since I’m not running for anything, I can announce a politically DOA tax plan. Let’s put in a dollar-cap on deductions and exemptions for items such as health insurance coverage. And then let’s just stop there. We need the money.

[Cross-posted at The Reality-based Community]

Harold Pollack is the Helen Ross Professor at the School of Social Service Administration at the University of Chicago.
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Comments

  • janinsanfran on October 15, 2012 8:59 PM:

    As you say, we need the money. Now when we need money, where can we go to get it? Oh yeah, there are billionaires who have made out like bandits lately (oh, maybe they are bandits?) Why shouldn't the rest of us get it from them, for the common good. If they don't want to share, they are simply criminals.

  • Peter C on October 16, 2012 9:35 AM:

    IF the deficit is our biggest economic problem, we should eliminate the deductions UNTIL the national debt is gone and THEN reduce rates. Why take the risk that the trickle-down theory which has FAILED every time will FAIL again.

    The fact that NO ONE (except Harold and I) is suggesting this, is more strong evidence that the debt and deficit ARE NOT our biggest economic problem, rather a way for Republicans to scream "OBAMA BAD!" and blame him for the poor economy that their sabotage has made worse.

  • paul on October 16, 2012 1:43 PM:

    The deduction-cap thing is sad, because it's among the stupidest ways to deal with broadening the base. Rich people would be able to restructure their income and assets to get around the cap in a few minutes of orders to the accountant, and middle-class people who happen to have serious expenses would be up the creek.

    I've got another DOA plan that makes more sense: Go back to the days when capital gains were taxed as ordinary income unless you held the item for a long, long time. Tax dividends and interest at a higher rate than wages, just as we used to. (If you're worried about widows and orphans, carve out an exemption for them.)