Lower the rates, broaden the base. Everyone agrees that such tax reform is a good idea, and the first half of that equation is simple enough. Pick a number, any number.
Paul Ryan’s numbers, as it happens, are 10 and 25. The House Budget Committee chairman’s new framework proposes collapsing the current six tax brackets (top rate, 35 percent) into two, with rates of 10 percent and 25 percent. Ryan would also lower the corporate tax from 35 percent to 25 percent — all, he says, without losing any revenue.
“We’re saying, get rid of the tax shelters, get rid of the loopholes, lower tax rates for everybody,” Ryan said in unveiling his plan.
Sounds great, right? But the second half of the tax reform equation is the tricky part, which helps explain why the appealing precision of Ryan’s tax brackets is not matched by any detail about what loopholes he would close.
Or, as Ryan put it, “As far as the tax rates are concerned, that is up to Ways and Means to decide which tax expenditures stay, which go, and what are the bend points within the income stream.” Translation: We’re talking only dessert now. Spinach comes later.
“Tax expenditures” is the wonky term for trillions in hidden spending, in the form of preferences and deductions, embedded in the tax code and badly in need of clearing out. Except that your special-interest loophole is my important social program. My base-broadening gores your ox.
And Ryan’s nifty-sounding new tax brackets would require him to come up with a jaw-dropping $4.6 trillion in loophole-closing over the 10-year period to meet his goal of breaking even, according to calculations by the nonpartisan Tax Policy Center.
On paper, in theory, that number is achievable. The Congressional Budget Office (CBO), examining the major tax expenditures — such as deductions for charitable contributions or home mortgage interest — found that they added up to some $12 trillion over 10 years. There are other, smaller tax expenditures studded through the IRS code.
Yet each one of these tax expenditures has its ardent defenders — and an accompanying arsenal of lobbyists. So in the real world it would be all but impossible to come up with anything near the $4.6 trillion that Ryan would need to avoid losing revenue.
Consider these numbers, derived from the CBO:
The mother of all tax expenditures — the tax-free treatment of employer-sponsored health insurance — amounts to $2 trillion over 10 years in lost income-tax revenue, not including the additional impact on payroll tax collections. Special tax treatment to encourage retirement savings, another $1.8 trillion. The deduction for mortgage interest, $1.6 trillion.
Pause to ask yourself: Are Ryan and his fellow Republicans going to tell people they have to pay tax on the value of their health insurance? Take away their tax-free retirement savings? Repeal the mortgage interest deduction?
(Hint: If you think that’s a possibility, consider the pitched battle, during the health-care debate, over subjecting only the Cadillac-iest of health care plans to a tax. Or the doomed fate of the Obama administration’s repeated budget proposals to limit — only limit, not eliminate — the value of deductions for the wealthiest taxpayers.)
Next comes the lower tax rate for dividends and capital gains, $1 trillion over 10 years. But that is a non-starter for Ryan & Co., who treat lower rates for investment income as a sacred principle.
The deduction for charitable contributions; the deduction for state and local taxes; the tax-free treatment of capital gains at death each amount to about $600 billion over the 10-year period: Are Ryan & Co. going after these?
As I said at the start, the tax base should be broadened — both to lower rates, as Ryan proposes, and to raise new revenue, as he recoils from.
The Bipartisan Policy Center’s Debt Reduction Task Force, chaired by former Office of Management and Budget director Alice Rivlin, a Democrat, and former Senate Budget Committee chairman Pete Domenici, a Republican, took a brave stab at this in its debt reduction plan. It came up with $3.8 trillion in savings by eliminating or pruning all of the above, and more.
By contrast, Ryan’s tax plan fails the basic test of responsibility. If Ryan and his colleagues have a workable proposal to cut tax rates that dramatically without losing badly needed revenue, let’s see it. If not, they should stop dangling glittery, expensive promises without showing how they plan to deliver.