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Fiscal Affairs: Beware of "Centrists" Bearing Consensus

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Floyd Norris has written another good column skewering the Republican candidates' tax proposals. It's not hard: all you have to do is list the many ways they want to cut taxes -- which make George W. Bush look like a veritable communist, out to confiscate all private wealth -- and point out the vast increase in budget deficits that would follow.

Near the end, Norris has this paragraph:

To some deficit hawks, like Maya MacGuineas, the president of the Committee for a Responsible Federal Budget, the campaign so far has been a disappointment. In tax policy circles, she said, there has been growing agreement that a reform similar to the 1986 Reagan tax reform is needed -- cutting rates and eliminating loopholes and deductions. But while that reform was revenue-neutral, she said, this one would need to raise revenue.

I wouldn't call myself a member of "tax policy circles," so maybe there is such a consensus. "Cutting rates and eliminating loopholes and deductions" was a feature of Bowles-Simpson, Domenici-Rivlin, and the Gang of Six. But that doesn't make it right.

Eliminating loopholes and deductions obviously makes sense, both because of the distortions they create and because of the growing national debt. This is something I've argued for myself. But why do we need to lower rates? Today's tax rates were set by George W. Bush in 2001 and are considerably lower than the rates that prevailed under Bill Clinton and, for that matter, during most of the history of the income tax. The tax rates on capital gains and dividends, in particular, are at their lowest levels since before World War II. For those of you who care about global competitiveness, total taxes in the United States are lower than in most other advanced industrialized countries. Given the expected growth in the national debt due to demographic shifts and health care inflation, the obvious thing to do would be to simply return to Clinton-era tax rates.

The need to lower rates is not economic, but political. The simple fact is that given the Republican Party of Grover Norquist, you cannot get a single prominent Republican to sign on to a tax plan that does not cut tax rates. Ergo, if you want to call yourself bipartisan, you have to cut rates. But that doesn't mean it's right; that just means that the Republicans have successfully eliminated their negotiating room, forcing would-be centrists to cave in to their demands.

MacGuineas did say that tax reform this time would have to increase revenue. That sounds good -- until you realize what "increase" means. Bowles-Simpson, Domenici-Rivlin, and the Gang of Six would all drastically reduce tax revenue from the levels dictated by current law.

Remember, under current law the Bush tax cuts all expire. These "centrist" plans only "increase" tax revenue by first adopting a baseline in which the Bush tax cuts are made permanent. That's how the Gang of Six plan promised to "provide $1 trillion in additional revenue" while at the same time providing "net tax relief of $1.5 trillion." Bowles-Simpson promised $180 billion in additional tax revenues in 2020 -- but their baseline assumed the continuation of the Bush tax cuts, which would reduce 2020 tax revenues by more than $500 billion. Domenici-Rivlin increased tax revenues by $435 billion over 2012-2020, but also only after making the Bush tax cuts permanent, costing almost $1.4 trillion over that period.* In each case, the "increased" tax revenue is only a small fraction of the tax revenue sacrificed to the Bush tax cuts.

Now, you may think that the appropriate level of taxes is just slightly above the level set by George W. Bush in 2001 and 2003. You may want to make the Bush tax cuts permanent and then trade off fewer loopholes for lower rates. But if that's what you think, just come out and say it. Don't claim to be increasing taxes in the name of fiscal responsibility.

* The cost of the Bush tax cuts here is from the CBO's August 2010 estimate and does not include interest on the additional debt.

James Kwak is the co-author of White House Burning: The Founding Fathers, Our National Debt, and Why It Matters To You, available from April 3rd. This post is cross-posted from The Baseline Scenario.