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What does broadening the base entail?

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Proposals to “cut rates while broadening the base” — that is, cutting marginal tax rates while limiting deductions and credits to make up for lost revenue — are almost a cliché these days. The bipartisan Wyden-Coats tax reform bill does it for the personal income tax, as Obama wants to do it for the corporate income tax. But many plans in this vein lack specifics. Paul Ryan’s budget, for instance, proposes cutting rates to 10 and 25 percent but does not specify which deductions to cut to make up the lost revenue.

Thankfully, as Suzy highlighted Tuesday, the good people at the Tax Policy Center are out with a new study illustrating what broadening the base would actually entail. Hang Nguyen, Jim Nunns, Eric Toder, and Roberton Williams estimate that cutting tax rates by 20 percent, as Mitt Romney proposes, would reduce income tax revenue by $320 billion in 2015. Meanwhile, tax expenditures would total $1.1 trillion that year. So one would have to reduce them by 29.1 percent to make the whole thing revenue-neutral.

And doing that is pretty hard, it turns out. The TPC breaks the tax expenditures down into four groups:

1. Deductions, most notably for employer provided health care, mortgage interest, and state/local taxes.

2. Investment tax expenditures, such as lower rates for capital gains and dividends.

3. Work/family tax credits, such as the Earned Income Tax Credit and Child Tax Credit.

4. Other exclusions, notably ones targeting military personnel and veterans.

Cutting the fourth category looks to be a nonstarter, and cutting the second would require raising taxes on investment income considerably, which doesn’t seem politically in the cards at the moment. So that leaves cutting benefits for the poor in the third group, or those for the middle class in the first one — and one would have to cut 56.4 percent of those two categories (or 72 percent of the first) to achieve revenue neutrality. Let’s compare how each income group’s tax burden would change if (a) both deductions and work/family credits were cut and (b) only deductions were cut (c) all expenditures were cut:

So cutting rates and expenditures never appears to work out for the bottom 80 percent of the income distribution, and the most likely proposals raise taxes on the bottom 90 percent as well. The top 10 percent, however, makes out pretty well.

This isn’t to say, of course, that all base broadening has these consequences. The Wyden-Coats proposal, for example, maintains a top rate of 35 percent and actually makes the tax code more progressive. But for those like Paul Ryan, who want base broadening reform with a top rate of 25 percent — even lower than the 28 percent top rate assumed in these calculations — it’s going to be hard to avoid making the tax code more regressive.