JONATHAN CHAIT JULY 21, 2011
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Here's something I did not expect at all: supply-siders appear at least open to supporting the Gang of Six budget. Larry Kudlow offers a qualified endorsement as does the Wall Street Journal editorial page:
[T]he outline from the three Republicans (including Oklahoma conservative Tom Coburn) and three Democrats is different from most other such offers because it combines spending cuts with reform that would lower tax rates. Most Beltway budget deals combine immediate tax increases with the promise of future spending cuts that somehow never occur. They enhance Washington's claim on the nation's private resources. This deal has promise because it would reduce that claim.
That's especially true of the tax reform outline, which suggests moving to no more than three income tax rates, with a top rate in a range between 23% and 29%. This would be "paid for" by closing loopholes and tax preferences, but a marginal rate tax reduction of that magnitude would be worth giving up a lot. It could be by far the most pro-growth tax change since the 1980s, and the U.S. needs faster economic growth now above all else....
Certain high-profile tax breaks, such as the mortgage and charitable deduction and for health care and retirement, would also be "reformed, not eliminated." Our hope would be that the tax writers could duplicate the sweeping 1986 tax reforms that closed scores of tax deductions while slashing personal tax rates to 15% and 28%.
The weird thing is that I like the Gang of Six plan, too. If The Journal editorial page (and Kudlow) and I both like the same fiscal program, chances are one of us is confused. I suspect, unsurprisingly, that the confused party is the supply-siders. The only way to get tax rates down to the levels they're talking about while raising the kind of revenue the Gang of Six is talking about is to eliminate the capital gains tax preference. I have a hard time seeing supply-siders go for that.
The 1986 Tax Reform Act did eliminate the capital gains tax preference, though successive presidents snuck it back into the tax code and progressively enlarged it. Right-wingers tend to completely ignore this fact, which complicates their story of Ronald Reagan as a unwavering supply-side champion. The entire thrust of conservative tax policy since 1986 has been to enlarge the capital gains preference and move away from the clean, broad-based income tax vision of 1986.
On the other hand, maybe they're not confused. Maybe they just fear the alternative scenario in which President Obama wins reelection and the Bush tax cuts expire more than they fear losing the capital gains tax break. The strange alliance does provide a slight glimmer of possibility.
11 comments
"The weird thing is that I like the Gang of Six plan, too." Yes, it is weird, because in the next paragraph you mention that the capital gains tax preference crept back into the tax code. And so will those tax expenditures (a/k/a deductions) that would be "eliminated" under the Gang's (and B-S's) proposal. As I have said many times, tax expenditures grow like kudzu. But tax rates, once lowered (as they would be under the Gang's (and B-S's) proposal, are next to impossible to increase. Thus, the net effect of the Gang's (and B-S's) proposal is perpetual deficits.
- rayward
July 21, 2011 at 9:09am
I am deeply, deeply skeptical of this approach for much the same reason supply-siders are skeptical of other budget deals: I see it giving Republicans what they want (lower rates) in exchange for a promise unlikely to be fulfilled (eliminating deductions). And even if we do get deductions eliminated, over time they will creep back in on little lobbyist feet, while rates once lowered are likely to stay low. I'm all for stopping up the loopholes in the tax code, but eliminating deductions is like housecleaning; it's not something where you do it and it's done. You do it, and then a decade or so later you have to do it again, and again. Lowering rates is like selling part of the house. Would you sell a room from your house to get someone to come in and clean it? If that person was going to come in and clean on a regular basis, you might; but not if they were going to come in, clean once, and leave.
- Dausuul
July 21, 2011 at 9:10am
Dausuul and I appreciate good (bad) metaphors. But doesn't the preaching of so-called fiscal hawks like Simpson and the Gang make one wish there really is a hell for snake-oil salesmen.
- rayward
July 21, 2011 at 9:27am
P.S. The one way I might support such a deal would be if it included a provision making the top tax rate dependent on deductions; any time a revenue-reducing deduction is added to the tax code, the top rate automatically rises to make up the difference. But of course Republicans would never go for that.
- Dausuul
July 21, 2011 at 9:28am
I don't think Kudlow's support means diddly. He may be a supply-sider, but he isn't a government-hater like the freakazoids in the House, and I'm sure he's got the banksters camped out on the doorstep to his office telling him that he needs to throw his ideology out the window and get behind a deal, ANY deal unless he wants to see 2007 Redux. Kudlow can be reached in a way that the House kamikases cannot. I have a chunk of change in a mutual fund that is mostly in the Australian share market but does have some exposure to the US (as does the whole of the Australian financial sector, frankly). I've been debating whether to pull that money out and find a nice, safe term deposit that'll get me 5 or 6%. I probably won't. Making a move like that would be too much like me acting like I actually know what I'm doing. I don't, and I wouldn't want to pretend I did. But if the USG defaults and the markets tank and I watch mine and my wife's investments lose half their value the way they did in 2007, at least I'll have the consoling pleasure of saying, "I predicted this! Should've gone with my instincts."
- AaronW
July 21, 2011 at 9:48am
I have a hard time thinking they will give up on their precious low capital gains tax on "job creators." If you went from 15 to 29 percent that would be anathema to them.
- MikeB.
July 21, 2011 at 9:52am
Life is full of surprises.
- liberalref
July 21, 2011 at 10:00am
I think the top rate should be higher. I don't like getting rid of deductions because I think we should move in the direction of taxing people based on their ability to pay; and deductions do that. It does little good to have the IRS pursuing people who are unable to pay because they spent their money on some good cause (a college education for their kids) or foolishly or in a way that used to be deductible. I'm all for getting rid of the capital gains preference which I think just motivates people to make money in the stock market instead of investing in a small business.
- Nusholtz
July 21, 2011 at 10:09am
@AaronW: What safe term deposit would you put your money in? If the US defaulted, it would engulf the entire financial system. You can't hedge against the end of the world. The only thing I can think of that you could count on to weather a US default would be gold; but then if there *isn't* a default, you'll take a substantial hit when a deal is made and gold prices fall. There's a reason they call them "gold bugs."
- Dausuul
July 21, 2011 at 10:20am
- Call me crazy ("______ ") but we should use an algorithm that would provide instructions for calculating-collecting revenue and I'll bet it would be less complicated than what Google uses. Doesn't it seem odd that we use different sorts of automated reasoning to analyze the economy but we're raising cash with a system that looks like it came out of Tammany Hall.
- michaelg
July 21, 2011 at 10:33am
I don't trust the Gang of Six proposal for a second. I feel like there's a major gotcha in there somewhere and people just haven't noticed it yet. I also second rayward and dausuul in the notion of lowering income taxes another inch because that's another inch we'll never get back but the tax deductions and all the other stuff is going to keep growing like wild strawberries.
- GSpinks
July 21, 2011 at 11:31am