Mar 26, 2012 at 1:55 am
The Congressional Research Service (CRS) is at it again, generating important and timely research on key policy issues (I blogged extensively on an inequality piece of theirs from a few months back). This one’s about tax expenditures and the information is critical to evaluating what I’ll call the “DC dodge”: claiming you’ll pay for big cuts in tax rates by closing unspecified loopholes.
Both sides do the dodge, but it showed up in all its finery the other day in Rep Paul Ryan’s budget, which cuts trillions—as in over $4t over ten years—by lowering income and corporate tax rates, all to be paid for later by closing unspecified tax loopholes.
The DC dodge refers to the trillion dollars in annual tax revenue that the Treasury forgoes by spending through the tax code, i.e., providing credits and deductions for a wide variety of activities. What’s important about the CRS piece is their careful assessment of what’s realistically there for the taking—given political and economic constraints, how much is really there to offset a rate cut?
This is a judgment call, and you should read it yourself to see if you agree, but here’s where they come out:
The results suggest that most of the revenue that could be gained by eliminating or modifying tax expenditures, as much as 90%, may be difficult to realize. It may prove difficult to gain more than $100 billion to $150 billion [per year] in additional tax revenues through base broadening. This additional tax revenue, however, is equivalent to about 6% to 9% of projected FY2014 individual income tax, and, consequently, would not allow for significant reductions in tax rates (about a one or two percentage point reduction, thus reducing the top 39.6% tax rate to 37%).
Rep Ryan (who takes the top income tax rate down to 25%), Bowles-Simpson, the President’s corporate reform—they all leave such blanks to be filled in, though the Ryan plan goes much further than the others. As a DC creature, I understand how specificity risks activating whatever lobby gets dinged by the loophole closure. But CRS provides an important reality check to the DC dodge, one we should keep in mind in any forthcoming reform debates.
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