EconomistMom.com
…because I’m an economist and a mom–that’s why!

EconomistMom.com

Unicorns and Magic Boxes: Bartlett (and Kleinbard) on the Perry Tax Plan

November 1st, 2011 . by economistmom

unicorns_box

Bruce Bartlett writes about the Perry (optional) flat tax plan in today’s New York Times Economix blog.  There are several fundamental problems with the plan that Bruce outlines:  (1) it’s not very “flat” in a base-broadening sense in that it retains a lot of the special preferences under the current income tax system; (2) it gives people the option of picking the tax system–the new, “flat” one or the old one–that gives them the lowest tax burden, and hence it is by design a revenue-losing proposition; and (3) like the Cain 9-9-9 or 9-0-9 or whatever 9’s you want plan, it would give a huge tax break to the rich who have lots of capital income that would now be exempt from taxation.

Problem #2 is what Bruce quotes Ed Kleinbard (former chief of staff of the Joint Committee on Taxation and now a professor at USC) as “a promise to put a unicorn in every pot.”  This is not tax reform to improve the efficiency of the tax system.  This is “tax reform” as an excuse to cut taxes for everyone–except for those who don’t pay income taxes under the current system, that is.  Bruce correctly points out that the vast redistribution of income that already occurs when you flatten the rate structure and switch to a consumption base is only made worse in these plans by their getting rid of refundable tax credits, the only way lower income households get subsidies from the income tax system.

Of course, all these flat-rate, consumption-based tax proposals like to claim huge economic benefits from the spectacular supply-side growth that would be encouraged from lower tax rates on the rich.  But those claims are based on–as Bruce quotes Ed Kleinbard again(!)–the “black magic box”-type models that the candidates’ sorcerer-economist advisers seem to be using.

So if unicorns and magic boxes are appealing to you, this is your kind of tax plan.  But if you believe we need a truly better tax system with the capacity to raise the revenue necessary to pay for the government we desire, in as efficient and as fair a way as possible, then keep tax proposals like these only in your fantastic dreams.  And by all means don’t vote for the candidate on the basis of this sort of proposal alone.

20 Responses to “Unicorns and Magic Boxes: Bartlett (and Kleinbard) on the Perry Tax Plan”

  1. comment number 1 by: Patrick R. Sullivan

    Not that Obama’s tax schemes could be subject to the same criticisms.

  2. comment number 2 by: AMTbuff

    A shift to consumption tax is anything but a free lunch to baby boomers who have accumulated after-tax money for retirement. In essence, a 17% consumption tax confiscates 17% of the net worth of these people. Progressives should love it, but for some reason they don’t. Could the problem be that there are too many rich progressives who don’t want to lose 17% of their net worth?

  3. comment number 3 by: Brooks

    AMT,

    Great point. The Perry campaign really should seize on that point to knock down support for Cain among seniors. I don’t recall seeing/reading that point made by any of the candidates — have I just missed their making that point, or are they missing a great point to make against Cain?

  4. comment number 4 by: Brooks

    See http://www.foxnews.com/on-air/fox-news-sunday/index.html

    First, kudos to Chris Wallace for pointing out the myth so many conservatives still feel so certain about — that tax cuts “pay for themselves”. But I wish Chris Wallace had been alert enough and smart enough to follow up appropriately to Perry’s have-it-both-ways response.

    Starting at 8:18, Wallace points out that, even after considering incremental growth from Perry’s tax cut, revenue is likely to be lower, NOT higher (vs. what it would otherwise be) as Perry’s campaign claims. Perry responds that lower revenue is a good thing! In other words, Perry’s campaign goes with the “tax cuts increase revenues” (or at least pay for themselves while leaving people better off) argument, presumably using the higher revenues he projects as part of his supposed budget balancing by 2020, then, when confronted with likely lower revenues, Perry goes with the “starve the beast” argument. I really wish Wallace had called him on that contradiction and on Perry’s seeming admission that his projection of higher revenues is bogus.

    A separate note: Starting at 12:05. Wallace asks how the heck Perry would get spending as a % of GDP down to a level Wallace claims has not been seen since the 1966 (although Wallace doesn’t mention that we dipped to 18.2% in 2000 and 2001*), and perhaps the only substantive thing Perry mentions (other than no more stimulus spending) is Social Security, yet he says what he will do won’t affect those who are on or “approaching” eligibility age; he just talks (apparently) about younger people financing their own retirements differently — something that not only won’t reduce spending for at least several years (whatever he means by “approaching”), but would presumably mean diverting some of the would-be revenues away from funding the current spending (more generally, from funding federal government spending), increasing deficits.

    Perry also mentions earmarks, which technically don’t increase spending (they just draw money from budgets, money that, in the immediate sense, would otherwise be spent by the department in question), although indirectly they probably do cause higher spending, but the main point is that they are NOT a huge part of even the medium-term fiscal imbalance (e.g., 2020).

    But the funniest part of the interview starts when Wallace asks the question about generating 2.5 million jobs. Wallace states that adding only that many jobs would mean an unemployment rate even higher than today (due to population growth — I guess he means growth in the work force more precisely). Perry states strongly that Wallace must be incorrect, saying “I don’t believe that for a minute. That is absolutely false on its face.” Perry flounders pathetically.

    * http://www.heritage.org/budgetchartbook/runaway-spending-tax-revenue and http://www.gpoaccess.gov/usbudget/fy11/pdf/hist.pdf

  5. comment number 5 by: Solomon Kleinsmith

    You can avoid the repressiveness of consumption taxes, and make the whole system much more fair, by merely taxing capital gains the same as any other income.

  6. comment number 6 by: Patrick R. Sullivan

    ‘…by merely taxing capital gains the same as any other income.’

    By making it zero, to avoid double taxation of investment income?

  7. comment number 7 by: Anandakos

    Whine, whine, whine. The “investment income” to which you sing paeans is nothing more than gambling winnings, unless you bought treasury shares, an IPO issue or an initial issuance bond.

    For people who are so Rah-Rah-Rah about bidness, Republicans sure don’t understand basic accounting and economics very well. The only person who contributed capital to an enterprise is the person who bought the share or bond from the issuer. If there is to be a preference for capital investment, it should go that person alone.

    Everything after that is speculation in used paper.

  8. comment number 8 by: Anandakos

    Buff,

    “Confiscates 17% of the net worth of these people”.

    Wrong! Epic Fail!

    With the exception of Roth accounts and “traditional after tax” IRA’s (very rare), tax preferenced accounts already have an accumulated tax burden. All withdrawals from 401K’s, 403B’s and “pre-tax” traditional IRA’s are subject to ordinary — and conceivably even AMT — income tax.

    They are also considered “income” for the computation of the portion of Social Security which is taxable.

    So Cain’s proposal is not much more than a shift of taxation from one vehicle to another for retirees using standard retirement vehicles.

    It WOULD BE a big hit for folks who converted traditional plans to Roth’s. They would be double taxed.

  9. comment number 9 by: Brooks

    The “super committee” is supposed to come up with deficit “reduction” of at least $1.5 trillion over 10 years.

    Can someone please tell me what baseline it must use per the legislation that established the committee, and if no baseline were specified, which baseline the committee has indicated it will use (if it has so indicated)?

    Please provide link to source if possible.

    It is annoyingly hard to find the answer in the reporting on the super committee, so I’d appreciate the help.

    I did come across this from a “guest blogger” at Christian Science Monitor:
    Budget experts tell me the committee has maximum flexibility to play with these baselines. It can mix and match or even make up its own. “They have all the flexibility in the world,” says Jim Horney, a long-time senior Senate Budget Committee aide. http://www.csmonitor.com/Business/Tax-VOX/2011/1110/A-deficit-supercommittee-progress-report

    But I’m not sure of credibility of the above.

    I’ve also seen Paul Ryan claim back in August that the legislation requires use of the current law baseline http://paulryan.house.gov/News/DocumentPrint.aspx?DocumentID=254863 while the White House says that is not the case, at least back in August http://m.whitehouse.gov/blog/2011/08/01/baselines-and-balance

    And can anyone tell me which baseline Republican members of the committee are using to calculate their revenue “increase” in the proposal the offered this week? It seems to me they are using current the policy baseline or perhaps some hybrid, but not current law baseline which would start them out apparently with $4 trillion more over 10 years vs. the current law baseline (extension of the Bush tax cuts), probably making their proposal a huge tax “cut” with huge losses in revenue.

    Thanks in advance for help on this.

  10. comment number 10 by: Brooks

    Correction — they must achieve at least $1.2 trillion in deficit “reduction”.

  11. comment number 11 by: Brooks

    I see now according to CBPP, projections of deficit “reduction” by the committee are per “the current policy baseline that members of both parties on the Supercommittee are using” http://www.cbpp.org/cms/index.cfm?fa=view&id=3612

    How ridiculous that a law required a committee to produce a plan with a specific amount of deficit “reduction” without making clear which baseline should be used. Or, if one accepts Ryan’s argument (which seems to make sense to me) that the legislation’s instruction for estimates of the committee’s plan to reflect how it “will affect the levels of such budget authority, budget outlays, revenues, or tax expenditures under existing law” (Section 401(b)(5)(D)(ii) of the Budget Control Act & Section 308(a)(1)(B) of the Congressional Budget Act), then the committee members have agreed to misrepresent the impact of their plans relative to how the legislation says it must be scored (relative to current law — i.e., assuming expiration of the Bush tax cuts and thus a higher revenue baseline), and if CBO scores it via current policy baseline, CBO will be violating the law (again, IF Ryan’s interepretation is correct, as seems to be the case to me just looking at that language as a non-lawyer).

    And it’s also unfortunate that deficit “reduction” is being measured vs. current policy, given that this means even if the committee produces a plan and even if it is enacted, it will put us on a fiscal path almost surely much worse than if Congress did nothing and let the tax cuts expire. I fully understand the perspective that allowing tax rates to increase from their levels of the past decade can be viewed as a tax increase, regardless of it occurring passively rather than actively, but there is still something lame about Washington taking credit for taking action that is worse than inaction.

  12. comment number 12 by: Brooks

    Correction of my “correction”, I think: It seems the objective is $1.5 trillion after all. But I saw it reported as $1.2 trillion too, so I’m not sure. Perhaps the difference is in savings on interest expense, but I don’t know.

  13. comment number 13 by: Brooks

    Example of conflicting info:

    From the NYT:
    The stated goal of the panel…is to reduce federal budget deficits by a total of at least $1.2 trillion over 10 years. It was given a deadline of Nov. 23, 2011. http://topics.nytimes.com/top/reference/timestopics/organizations/c/congress/joint_congressional_committee_on_deficit_reduction/index.html

    From the committee’s own website:
    The Joint Select Committee is charged with issuing a formal recommendation on how to reduce the deficit by at least $1.5 trillion over the next ten years. http://www.deficitreduction.gov/public/index.cfm/about

  14. comment number 14 by: Vivian Darkbloom

    Brooks,

    Regarding the $1.2 trillion versus $1.5 trillion amounts, here is my understanding:

    The target set for the Super Committee is to reduce the 10-year deficit by $1.5 trillion. However, the automatic spending reductions only kick in if the Committee fails to come up with $1.2 trillion of deficit reduction. The automatic spending reduction “trigger” is itself $1.2 trillion. Thus, for example, if the Committee were to come up with $1 trillion of deficit reduction, the “trigger” would only be $200 in automatic spending cuts. If the Committee would come up with $1.3 trillion in deficit reduction, they would not have met their target, but the automatic spending reduction would not be triggered.

  15. comment number 15 by: economistmom

    Yes, Vivian is right! I may try to post a handy graphic that Concord has used in some of our chart talks. Sorry I’ve been so MIA, everyone. –Diane

  16. comment number 16 by: Vivian Darkbloom

    Why the exclamation mark? Am I not always right?!

  17. comment number 17 by: Brooks

    Thanks Vivian. I wish the media had been as clear.

  18. comment number 18 by: SteveinCH

    Brooks,

    I can answer one question. The Republican lawmakers are using the current policy baseline to calculate their revenue increases. What I cannot answer is what baseline the Democratic lawmakers are using to calculate their tax increases. I think it may also be current policy but I cannot say for sure.

  19. comment number 19 by: Brooks

    Steve,

    It seems counterintuitive that the Rs were arguing previously that the current law baseline must be used to score any plan from the committee. After all, if the current policy baseline is used instead, any increase in revenues vs. current tax rates and other tax provisions can be represented as compromise by the Rs, as seen with the R proposal and the associated $300 billion in revenue “increases”.

    I think the reason Rs were insisting on current law baseline before is because, if current law baseline were used, it would be highly unlikely that a plan put forth by even the Dems would “increase” revenues, because that would mean higher revenues than would be generated by complete expiration of the Bush tax cuts as scheduled, and if the super committee were only authorized to include in a plan tax changes that “increased” revenue, it wouldn’t be able to touch taxes, because even a Dem proposal would “reduce” revenues vs. the current law baseline. Therefore, the R reasoning went (I think), if the current law baseline is used for scoring, in effect the law makes it practically impossible for the Dems to propose tax changes that increase revenues vs. current tax rates and other tax policy. Washington is pretty f-cked up.

  20. comment number 20 by: SteveinCH

    Brooks,

    You have the right of it. The original R plan was to use current law and preclude tax increases. Once the Ds went to current policy or slightly modified current policy, the Rs were more or less forced to current policy since the alternative was to fight on the baseline while the Ds were trumpeting tax increases.

    Totally agree with your last sentence.