Tax Analysts Blog

Democrats Needlessly Insisting on Rate Hikes

Posted on Dec 4, 2012
The lead editorial in this morning's New York Times perpetuates a myth that has become a needless sticking point in the current budget debate. It states:

If Mr. Boehner had used a calculator, for example, he would have discovered it is impossible to produce $800 billion in revenue from eliminating deductions without severely curtailing the deduction for charitable donations, which is vital to the nonprofit sector.

Well, perhaps if you arbitrarily limit the set of tax benefits you are willing to cut to itemized deductions, it would be difficult to raise $800 billion over 10 years. But there are a lot more tax breaks out there than itemized deductions (most notably, the biggest tax expenditure of them all, the exclusion for employer provided health insurance). A recent high-profile TPC study (that famously showed revenue neutral base-broadening could not pay for 20 percent rate cuts) also shows (Table 3) that limiting tax expenditures on those over $200,000 would raise more than $120 billion a year. And since that figure assumes rate cuts of 20 percent, this base broadening would raise 20-25 percent more than $120 billion if the top rate stays at 35 percent. Moreover, this figure does not include any increase in capital gains rate or increases in estate taxes (both proposed by the Obama Administration).

Yes, it will be politically impossible to massively cut tax expenditures for the wealthy. But it is mathematically possible and if done right could be better economics. If the Republicans are insisting on not raising rates AND agreeing to have tax increases fall exclusively on the wealthy, why don't Democrats simply let the Republicans float their plan for base-broadening without rate hikes?

Read Comments (1)

Vivian DarkbloomDec 5, 2012

The NYT editorial board opined:

""If Mr. Boehner had used a calculator, for example, he would have discovered
it is impossible to produce $800 billion in revenue from eliminating deductions
without severely curtailing the deduction for charitable donations, which is
vital to the nonprofit sector. Doing so without limiting the charitable
deduction would inevitably raise taxes on the middle class, as nonpartisan
analysts have concluded, and would have a much greater effect on the upper
middle class than on the very rich."

They are apparently totally ignorant of Obama's own tax proposal in the 2013
budget (which they have endorsed) which contains the following proposals that
apply only to "the rich":

1. Re-instate PEP and Pease. The former restricts personal exemptions for
high-income taxpayers and the latter restricts itemized deductions *including
charitable deductions*! The administration has estimated these two items would
produce $165 billion in additional revenues over ten years.

2. Restrict the benefit of itemized deductions and certain other tax
expenditures to 28 percent. These restrictions include:

State and local bond interest, employer-sponsored health insurance paid for by
employers and health insurance costs of self-employed persons, contributions to
IRA’s and defined contribution retirement plans, deduction for income from
domestic production activities, certain employee trade and business expenses,
moving expenses, contributions to HSA’s and Archer MSA’s and interest on
education loans.

This item has been scored by the administration at $584 billion over ten years.

Add these two together and you get $749 billion. Both proposals significantly
restrict the tax deductibility of charitable contributions *solely by the
rich*. Add a couple of other items or restrict the benefit lower than 28
percent and you're there!

So, in fact, in respect of restricting tax expenditures, the Republicans have
offered $51 billion more than is in the administration's own budget! What more
do they want?

This is sad, but a typically knee-jerk editorial by the Grey Lady.

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