The Tax Reform Trap: This Time, It’s Personal…

August 20th, 2013 at 12:00 pm

As OTE readers know, the tax reform trap, a term coined by my CBPP colleagues Marr and Huang, is when policy makers or ersatz budgeteers propose tax reform that calls for rate cuts now and loophole closures to pay for them later.  It’s “lower-the-rates, broaden-the-base” where you nail the first part and flub the second.

As per this AMs WaPo, that’s precisely what Ken Cuccinelli is up to in his run for governor of VA, my own state!  As the Post points out,

Mr. Cuccinelli’s plan consists of one sentence, plus four very brief bullet points. Grandly known as “The Cuccinelli Economic Growth & Virginia Jobs Plan,” it fits neatly onto about half a page.

…for all its brevity, [his plan] does contain one idea. By slicing business income taxes by a third and personal income taxes by 13 percent, Mr. Cuccinelli would slash $1.4 billion in revenueabout 8 percent of Virginia’s overall annual tax base.

Yet somehow — here’s where the magical part comes in — Mr. Cuccinelli insists that, under his plan, revenue would hold steady and the state’s already lean budget would be held harmless.

…squaring this circle would simply require eliminating loopholes and deductions for those who are coddled by the state’s tax code. That sounds great in the abstract, but which loopholes and deductions does Mr. Cuccinelli have in mind? Naturally, he isn’t saying.

Here’s that part of the plan, verbatim: “Identify and eliminate outdated exemptions and loopholes that promote crony capitalism.”

There it is, folks…as clear a version of the trap as you’ll find.  I do not think Virginians will fall for it, especially given that the tax structure there is already regressive (see figure below) and this plan, by cutting the parts of the code that are more progressive—income and business taxes, vs. the regressive sales tax—would make the revenue system even less progressive.

 

 

 

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7 comments in reply to "The Tax Reform Trap: This Time, It’s Personal…"

  1. Seattle Alex says:

    This makes sense to me and I loathe it, but is there a liberal corollary in recent political history? I’m just curious if conservatives ever point to a similar liberal tax policy promise that only gets partially fulfilled. I guess that would be taxing to balance the budget but then just spending the increased revenue? If that’s so, the story of liberal budget inflation is a weak one.


    • Jared Bernstein says:

      Maybe, but tax increases are so rare in recent history relative to tax cuts that there’s hardly a record. Clinton raised taxes and that new revenue contributed to lower deficits (and eventually surpluses), though growth was the bigger story there. And of course, the tax increases from the fiscal cliff deal went to deficit reduction. So I don’t think there’s much of a parallel case.


      • Ross Kaminsky says:

        Jared,

        If you look at tax data, it wasn’t Clinton’s tax hikes which boosted the economy or government revenue, but instead it was the capital gains tax cut a couple of years later.

        After the tax hike, the economy (and tax revenue) underperformed predictions. After the tax cut, both exceeded predictions.


  2. Fred Donaldson says:

    The goal of government once was identification of public needs and the means to achieve them, including the labor and financing necessary.

    Today, the goal for government is often just eliminating goals and present needs, only to save money – in effect, to decide how to do nothing new, to continue as few things as possible that are necessary for the majority, and to lower the financial burden on the top percent in the hope that their slightly increased fiscal happiness will trickle down golden droplets of economic joy on the rest of us.


  3. Tom in MN says:

    It’s buying votes coming and going. Give everyone a tax break up front and then a “wink wink” to each interest group when discussing tax breaks to let them know theirs will not be cut. Much easier than trying to sell the idea that government can help you out if everyone pays a fair amount of taxes.


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