What Matt Said

May 23rd, 2011 at 4:19 pm

Matt Yglesias raises an important point here about conservatives who can’t abide any increase in tax rates but will entertain raising more tax revenues through reductions of tax expenditures–that cool trillion or so we forgo in tax revenue each year through various favored activities in the tax code, like the mortgage interest deduction or the exclusion from the tax base of employer-provided health care.

I was recently on a tax panel with some prominent conservatives and at some point in there they too said this was an acceptable way to raise some much need gov’t revenue.

Totally agree with Matt that this is a potentially positive development–it puts revenues (not just spending cuts) where they should be, i.e., on the table.  But let me also count the ways in which it makes me nervous.

–like Matt says, this can’t be a substitute for higher rates, and on that point, conservatives are united and wrong.

–conservatives who accept this idea generally don’t want to solely raise more revenue by closing out tax expenditures; they want to “broaden the base and lower the rates.”  That means they want to give some of the revenue they raise by cutting these expenditures back to the taxpayer through lower tax rates.   That may be fine and just, but how much?  If you take the rates down “too far”–which anyone paying attention will agree is a plausible risk–the gov’t could end up with very little revenue out of this deal compared to, say, higher rates on families above $250K as in the Obama plan.

–Taking back tax expenditures is MUCH harder than a lot of folks make it sound.  It sounds benign but in fact, somebody loses, and when somebody loses in this town these days, it’s a lot more likely to be the shallow pockets as opposed to the deep ones.

So forgive me if I fear for the recipients of the Child Tax Credit or the Earned Income Credit, both of which tend to benefit lower income families, much more than I fear for recipients of higher end credits, like mortgage interest or capital gains exclusions.

If you like lots of numbers, take the time to learn more about these expenditures.  Go to the Tax Expenditures Spreadsheet on this page.

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One comment in reply to "What Matt Said"

  1. El Cid says:

    Ronald Reagan and the Heritage Foundation were behind the raising of the Earned Income Tax Credit by so much that such huge numbers of lower income families pay little or no *income* tax.

    (They pay *plenty* of other taxes, the net percentage of them being a higher proportion of their — ha ha, my — income than the wealthy pay.)

    Yet now conservatives pretend that this is some sort of liberal social engineering to soak the rich and let those danged lower income people off free, etc.

    Not to suggest that they care about the actual truth, but 1,000 years ago when the great Reagan strode across the land, the idea was that taxes were a cruel burden. Therefore, this cruelty should be least borne by those less able to shoulder it, and if they can be freed of such weight to stand better, then they can achieve more and we all grow.

    Yes — that lower income families pay little to no income taxes is a policy of Ronald Reagan. Ronald Reagan. It’s because of Ronald Reagan that low income families pay little to no income taxes. (Repetition often needed in these cases.)

    Ronald Reagan. That’s who did it. And the Heritage Foundation bragged about it as recent as 2000.

    ————————

    [Under Ronald Reagan’s tax reforms,] Average effective income tax rates were cut even more for lower-income groups than for higher-income groups.

    While the average effective tax rate for the top 1 percent fell by 30 percent between 1980 and 1992, and by 35 percent for the top 20 percent of income earners, it fell by 44 percent for the second-highest quintile, 46 percent for the middle quintile, 64 percent for the second-lowest quintile, and 263 percent for the bottom quintile.15

    These reductions for the lowest-income groups were so large because President Reagan doubled the personal exemption, increased the standard deduction, and tripled the earned income tax credit (EITC), which provides net cash for single-parent families with children at the lowest income levels.

    These changes eliminated income tax liability altogether for over 4 million lower-income families.16

    http://www.heritage.org/research/reports/2001/03/the-real-reagan-economic-record

    ————————

    See that? It was Reagan. Which isn’t to suggest he established it or that successors (like Clinton) didn’t expand and refine the EITC.

    It’s to point out to the whining right wing screamers about how UNFAIR it is that the lower income earners pay no taxes when they do *should be blamed on Ronald Reagan*.

    [Note that after the quoted section on the liberation of the poor from the burden of taxes, the Heritage Foundation goes on to say that you can’t count the burden of the payroll tax in calculating the tax burden on lower income earners, because that’s all imposed by prior big governments so shut up.]


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