Joint Committee on Taxation Experiment Proves Tax Reform Can Lower Rates
Thursday, October 18, 2012
There has long been bipartisan support for comprehensive tax reform that lowers rates and broadens the base. A new self-described “experiment” released by the Joint Committee on Taxation (JCT) reinforces the merits of this approach.
Unfortunately, some partisans are twisting JCT’s findings and conclude that meaningful tax reform is simply not possible without raising taxes. A new report from the Committee for a Responsible Federal Budget (CRFB) determined, “That conclusion is false and most comparisons between the JCT experiment and existing comprehensive tax reform plans are highly misleading.” Furthermore, when the President attempted to use the JCT study to assail tax reform, Bloomberg News issued the following fact check: “Obama takes the study’s results out of context…[and]…some of the money in the study that doesn’t go toward rate reduction is available to…lower rates.”
CRFB Calls the Results “Highly Misleading”
Adopting JCT’s approach to repeal the limited universe of tax benefits outlined in the experiment would raise $2.6 trillion. If dedicating $700 billion of that allows tax rates to be reduced across the board by 4 percent, then dedicating the entire $2.6 trillion – nearly four times that amount – would allow rates to be reduced significantly more. Regardless, any plain reading of JCT’s work indicates tax reform is feasible.
- “The experiment raises $4.5 trillion for deficit reduction over a decade relative to current policy by assuming as a starting point that all the tax cuts from the last decade will expire. That is far more revenues than other plans, substantially reducing the savings available for rate reduction."
- “The study only repeals itemized deductions and the interest exclusion for new state and local bonds, leaving trillions of dollars in other tax expenditures untouched including the largest tax expenditure in the code, the employer health insurance exclusion."
- “The study taxes capital gains at 38 percent, which JCT estimates would lose revenue since investors will realize fewer gains."
- “In its experiment, JCT dedicates only $700 billion for rate reduction, whereas actual tax reform could rely on far more revenues for rate reduction by repealing or reforming other tax expenditures and by using some of the $4.5 trillion of net revenues to reduce rates.”
Bloomberg News Fact Check:
- “The Facts: Obama takes the study’s results out of context.”
- “The context and the caveats of the study are important, and Obama omitted them.”
- “In the experiment, $851 billion is devoted to reducing rates by 4 percent and taxing capital gains as ordinary income. Another $986 billion is devoted to repealing the alternative minimum tax. Within that AMT repeal estimate, however, is the cost of preventing the tax from its scheduled expansion. Neither party wants the AMT to spread and neither party wants to pay for preventing that expansion. That means some of the money in the study that doesn’t go toward rate reduction is available to…lower rates.”
Dispelling the So-Called Support for a $5 Trillion Tax Increase
History Shows that There Is Strong Bipartisan Support for Comprehensive Reform that Lowers Rates
- Following the “current law baseline,” the JCT model assumes that all tax cuts will expire, and that taxes would rise for all taxpayers.
- While there have been threats lodged by Democrats to let the low-tax policies expire for all Americans, there is currently no legislative proposal that contemplates this outcome.
- A $5 trillion tax increase is more than twice the tax increase in President Obama’s budget, which included $2 trillion in higher taxes for American taxpayers.
- Not one Senator, Republican or Democrat, voted for the $2 trillion tax increase included in President Obama’s budget. This raises the obvious question – if nobody will support a $2 trillion tax increase, then why would they support a $5 trillion tax increase?
- Looking back to the last successful, bipartisan comprehensive tax reform effort (the Tax Reform Act of 1986), a February 2011 paper from Ernst & Young notes that there are more ways to achieve “base broadening” than simply “repealing or reducing tax expenditures.” The paper states, “more than 40% of the 1986 Act’s $528 billion in tax increases were derived from non-tax expenditures.”
- The Tax Reform Act of 1986, which was agreed to by President Ronald Reagan, a Democratic House and a Republican Senate, reduced the top marginal rate by 22 points – from 50 percent to 28 percent – without raising revenues.
- President Obama’s own fiscal commission, led by former Clinton White House Chief of Staff Erskine Bowles and former Republican Senator Alan Simpson, presented options that eliminated loopholes in order to reduce the top tax rate by up to 16 points to a rate of 23 percent.
- The 2011 paper by Ernst & Young also highlighted the Obama Administration’s confidence in base broadening and noted, “The president’s 2012 budget, for example, shows that additional base broadening is possible, since 59% of its proposed tax increases are not tax expenditures.”