By Cliff Montgomery – Aug. 9th, 2012
Key Republican lawmakers have introduced tax deform bills which could only explode the deficit and shift the tax burden from the wealthy to the working class, stated a study recently released by the Center on Budget and Policy Priorities (CBPP).
The CBPP is a leading think tank which “conducts research and analysis to help shape… fiscal policy and public programs that affect low- and moderate-income families and individuals,” according to the Center’s mission statement. Washington Post columnist Ezra Klein has gone so far as to call CBPP the “fastest, fairest, and smartest policy think tank in Washington.”
Below, The American Spark quotes a section of the Center’s instructive study:
“Republican legislation that was introduced in the Senate by Minority Leader Mitch McConnell (R-KY) and Finance Committee ranking member Orrin Hatch (R-UT) and in the House by Ways and Means Committee Chairman Dave Camp (R-MI) would establish requirements for tax-reform legislation that could generate higher deficits and substantially shift tax burdens from high-income to low- and moderate-income taxpayers [i. e., the working class].
“The House version, on which the House will vote this week [the House passed its bill on Aug 2nd, 2012], would require congressional tax-writing committees to produce legislation next year that:
1) cuts the top individual tax rate from its current 35 percent level (and the 39.6 percent to which it’s slated to return on January 1) to 25 percent and cuts most other tax rates as well,
2) cuts the top corporate tax rate from 35 percent to 25 percent and eliminates corporate taxes on foreign profits, and
3) eliminates the Alternative Minimum Tax (AMT), which was established to ensure that all high-income taxpayers pay at least some minimal amount of tax.
“The House bill also provides a ‘fast track’ process for House and Senate consideration of legislation that meets the bills’ requirements.
“Policymakers broadly agree on the need to address long-term budget deficits, and they increasingly recognize the need for a balanced approach that includes revenue increases.
“The House and Senate bills represent a significant step backward in this regard. They would:
- Fail to require any deficit reduction and, in fact, invite higher deficits.
The House bill calls for tax-reform legislation that would produce only about the same level of revenue as if policymakers made all of President Bush’s tax cuts permanent, while the Senate proposal calls for tax changes that would either be ‘revenue neutral or result in revenue losses’ (emphasis added) compared to a continuation of current policy.
Given the need for additional revenue to help address mid- and long-term deficits, a requirement that tax reform be revenue neutral would be highly problematic because it would lock in a permanent tax-rate structure and scale back ‘tax expenditures’ (deductions, credits, and other preferences) without producing any deficit reduction.
The scheduled expiration of the Bush tax cuts on December 31 (and policymakers’ upcoming decisions on whether to extend them) and the potential to curb tax expenditures provide the only two realistic opportunities now available to secure a significant revenue contribution to deficit reduction.
By creating a process to establish a permanent tax-rate structure and scale back tax expenditures without reducing the deficit, the House and Senate bills not only would produce no savings now but also would effectively take revenues off the table for deficit reduction for a number of years to come.
The Senate bill’s language that allows for tax reform to generate revenue losses goes even further, effectively inviting deficit-increasing tax cuts. It would allow tax-reform legislation that loses substantial revenues and thereby increases deficits, while barring legislation that raises revenues and shrinks deficits.
- Cut individual income tax rates well below the already unaffordable Bush levels.
The House version mandates a top rate of 25 percent (as well as a lower 10 percent bracket). The Senate proposal is less specific, calling for a top rate ‘significantly below’ the current 35 percent rate and for a proportional cut in other tax rates.
Both versions call for eliminating the AMT. Not only would these changes disproportionately benefit high- income households, they would be extremely costly as well.
For example, the Tax Policy Center (TPC) has estimated that the proposal reflected in the House bill to create two tax brackets — 25 percent and 10 percent — and eliminate the AMT would lose $3.2 trillion in revenue over ten years.
- Slash the top corporate tax rate and eliminate taxes on foreign profits.
While calling for revenue-neutral corporate tax reform, the House and Senate bills would cut the top corporate tax rate to no more than 25 percent (from the current 35 percent) — a change that, by itself, would cost $1.1 trillion over ten years, TPC estimates.
The congressional Joint Committee on Taxation (JCT) estimates that even if policymakers eliminated nearly all major corporate tax expenditures and devoted all of the revenue to paying for rate cuts, they could reduce the corporate top rate only to about 28 percent.
The bills also call for setting the corporate tax rate on foreign profits at zero by adopting a ‘territorial’ tax system.
- Not identify specific measures to broaden the tax base.
While the House bill specifies that both the top individual and corporate tax rates must fall to 25 percent and the Senate bill moves in a similar direction, both bills are vague about the tax expenditure reforms that supposedly would offset the cost of their very large rate cuts.
The House bill calls only for ‘broadening the tax base,’ the Senate bill only for ‘reducing the number of tax preferences.’ That raises the risk that lawmakers will reduce tax rates but not follow through on curbing expenditures, thus swelling budget deficits.
- Not protect low- and moderate-income Americans.
The Senate bill requires only that tax reform ‘retain a progressive tax code,’ meaning that the tax reform legislation itself could be regressive so long as doesn’t entirely eliminate the tax code’s overall progressivity. (Moreover, the proposal does not define ‘progressivity’ – some lawmakers have adopted dubious definitions to claim, for example, that the Bush tax cuts are progressive.)
The House bill lacks even this minimal requirement.
The proposals thus provide no protection from policy changes that would shift tax burdens down the income scale by giving large net tax cuts to high-income individuals and net tax increases to low- and moderate-income families.
That’s because the tax rate cuts that the bills call for would be very regressive and give their biggest tax cuts by far to people at the top, while curbs on tax expenditures could cause significant tax increases for low- and middle-income families.
That’s especially true if, as many Republicans favor, policymakers protect the primary tax expenditure that benefits people at the top — the low top rate on capital gains and dividend income — while substantially cutting tax expenditures on which ordinary families rely.
“The bills’ absence of a firm deficit-reduction requirement, combined with their requirements for costly and regressive tax rate cuts, illustrate the danger that the tax reform process could become a trap, producing legislation that boosts deficits, reduces tax code progressivity, and widens after-tax income inequality.”
