The “expenditure” trap

The “expenditure” trap

by digby

You know I’m just an old country blogger with no particular expertise, but I’ve been warning about this Tax Reform scam for quite some time.

Jared Bernstein is on the case:

A couple of my CBPP colleagues have written an important paper—a warning, really—on tax reform. Chuck Marr and Chye-Ching Huang describe a trap that almost every tax reform effort I’ve heard about in recent months risks falling into. It’s critical that we wrap our heads around this, because major tax reforms are rare and if one is coming—and it might well be—we can’t afford to blow it.

This is their warning:

–the mantra of all tax reform initiatives these days is “lower the rates, broaden the base” where the latter means ending certain tax expenditures (a wide variety of tax breaks and credits ranging from the Earned Income Credit—a wage subsidy for low wage workers—to the reduced rate on capital gains).

–but most of the actual reform proposals—like those of Rep Paul Ryan, Gov Romney, or the Bowles-Simpson commission—cut rates first, with an agreement to find the base broadeners later (Bowles-Simpson, to be fair, included “illustrative” cuts, but the members of the commission were unable to reach agreement on them).

Therefore, TAX REFORM THAT LOWERS RATES WITHOUT FIRST LOCKING IN HIGHER REVENUES WILL VERY LIKELY FAIL TO RAISE THOSE REVENUES.

Now I happen to be very skeptical that ending “tax expenditures” for the wealthy will ever end up raising revenues because they have armies of tax lawyers and lobbyists to ensure that won’t happen. (They could raise some revenue by screwing the poor and middle class by ending things like the EITC and the home mortgage deduction, however.) So, I think the best course is to substantially raise the rates on the wealthy and then see how it goes.

But certainly we shouldn’t lower them first and then let the “tax expenditure” sit for another day. That’s just nuts.

The whole thing sounds very much like the supply-side magical thinking that screwed us hard for several decades. “Shazaam! We can lower your rates and it will bring in more revenue!” It never seems to bring in any money but the rates become the baseline and stay too low to properly fund the government. It’s the drowning in the bathtub strategy.

Anyway, I’m just glad to see that people are starting to push back on “tax reform” as it’s currently constructed. It’s a loser for the people in any number of ways. Actually lowering overall taxes for the wealthy at this moment of such extreme income inequality is just daft.

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