Distributional Impacts of Tax Cuts and Spending Cuts

October 2nd, 2012 at 6:00 am

Just thinking about a point that I thought deserved greater amplification given the debates of the moment—a couple of factoids that combine a number of interesting dynamics currently under discussion.

Gov Romney’s tax plan is consistently criticized as being mathematically impossible in the following cents sense: He wants to a) cuts federal income tax rates by 20% across the board—so the top rate, e.g., goes from 35% to 28%, b) protect the “middle class” from any tax increases, and c) maintain revenue neutrality so as not to increase the deficit. 

As the Tax Policy Center work has shown, that math doesn’t work out because even if you closed every loophole enjoyed by upper-income families, there’s still not enough revenue up there to offset the rate cuts (see the last three bars in their figure 2, noting that the blue bars—revenue losses from rate cuts—are higher than the red ones—revenue gains for base broadening).

The TPC—and logic—suggests that this means that in order to maintain revenue neutrality and not add to the budget deficit, taxes would have to go up on other income groups, which they labeled “…a necessary but perhaps unintended consequence.”

But what if they decided to make up the revenue losses with spending cuts?  Clearly, this would admit that their tax plan was not revenue neutral, but it is, at least in theory, a way to avoid a larger budget deficit.  Remember, it is the deficit which has been the victim of supply-side tax cuts like this in recent years.

The problem here, as shown in some of our recent work at CBPP, is that the non-defense spending cuts implied by the Romney proposals would have further negative impacts on the most economically vulnerable.  If such cuts were applied proportionately,

“…the cuts in programs such as veterans’ disability compensation, Supplemental Security Income (SSI) for poor elderly and disabled individuals, the Supplemental Nutrition Assistance Program (SNAP, formerly food stamps), school lunches and other child nutrition programs, and unemployment compensation would cause the incomes of large numbers of households to fall below the poverty line. Many who already are poor would become poorer.”

The punch-line is that because both the federal income tax and the non-defense spending are progressive, large tax cuts targeted at the wealthy along with spending cuts on social insurance, the safety net, education assistance, and so on, would constitute a double whammy.  As the TPC folks put it: “a large-scale reduction in government spending would likely be significantly more regressive than reductions in tax expenditures.”

And given the fact that its middle-class and lower income families that have benefitted the least from overall economic growth in recent years, that’s exactly the wrong direction in which to push tax and spending policies.

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One comment in reply to "Distributional Impacts of Tax Cuts and Spending Cuts"

  1. bakho says:

    BigG used to fund a larger share of HigherEd. Those costs have been pushed off to the Middle Class. Predatory Loan Sharks are allowed to collect rents from the salaries of college grads. Just one more way for the greedy special interests to skim money that the rest of us earn. Our taxdollars are even used to guarantee the Loan Sharks a hefty profit when the money should be spent on subsidizing real education.