Here we ago. Another study attempts to show that it’s pretty much impossible to pay for marginal tax rate cuts by broadening the tax base (via Bloomberg Business Week):
Immediate repeal of some of the most popular tax benefits would pay for only a 4 per cent cut in U.S. income tax rates, according to an estimate by Congress’s nonpartisan scorekeeper that illustrates the mathematical and political challenges of financing rate cuts by limiting tax breaks.
The analysis by the Joint Committee on Taxation emphasises the difficult choices facing lawmakers as they balance the benefits of rate cuts against the consequences of changing or ending deductions, such as for mortgage interest and charitable contributions. Republican presidential nominee Mitt Romney proposes a 20 per cent income-tax rate cut and says he would pay for it by limiting deductions, credits and exemptions.
Not quite. The bipartisan Committee for a Responsible Federal Budget finds three huge flaws with the JCT’s analysis:
- The study is revenue-neutral relative to a baseline in which all the tax cuts from the last decade expire — a policy which neither party supports or measures against. Relative to the more commonly-used baseline, this plan raises taxes by $4.5 trillion over a decade.
- The study only repeals itemized deductions and the preference for newly-issues state and local bonds. It therefore does not account for dozens of additional tax expenditures worth trillions of dollars – including the largest tax expenditure in the code which excludes employer health insurance from taxation.
- The study taxes capital gains at 38 per cent, which according to JCT would actually lose revenue. JCT tends to estimate the revenue-maximizing level at about 28 per cent.
Eliminating all tax expenditures would actually allow the top rate to fall as low as 23% — and still leave about $1 trillion in revenue leftover for deficit reduction this decade.
Photo: James Pethokoukis
Now this is all proof of concept. No president is likely to eliminate all those tax breaks. But it does show there is room for significant and revenue-neutral tax rate cuts in the 28% to 33% range even without a big boost to economic growth. And let’s also consider that common estimates of revenue loss from slashing the corporate tax rate are wildly too high.
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