Jacob Hacker’s Baselines

by Reihan Salam

The latest Room for Debate is on the income gap and deficit reduction efforts. Jacob Hacker writes the following:

Tax Proposals that Increase Inequality. A win-win approach would make the tax code simpler, more efficient, and more progressive. Alas, that’s not what leading proposals do. As the nonpartisan Tax Policy Center reports, the tax provisions of the proposal put forth by the co-chairs of the president’s Deficit Commission would reduce after-tax income by nearly 3 percent for the bottom 40 percent of Americans and raise it by almost 1 percent for the top 20 percent and by 0.5 percent for the top 1 percent. Yes, the proposal would reduce after-tax income among the richest 0.1 percent, but the reduction would be less than half as large as that faced by the poorest 20 percent.

What Hacker doesn’t note is that the report he links to is comparing the Bowles-Simpson proposal to the Current Law baseline. And this has important implications. Note that President Obama has called for extending the 2001 and 2003 tax cuts, apart from the high-income rate reductions and a few other provisions. And this position has been embraced by virtually all congressional Democrats, many of whom also favor extending the high-income rate reductions, either temporarily or permanently. Note that many of the benefits of these “middle-income” cuts would flow to high-earning households for income earned under the $250,000 threshold, though this would have no impact on work incentives.  

As Howard Gleckman of the Tax Policy Center explains, comparing Bowles-Simpson to the tax code as modified by the 2001 and 2003 tax cuts yields a different outcome:

The commission asked the Tax Policy Center to analyze an “illustrative” version of the plan, and we found in 2020 it would raise taxes, on average, by about $1,800. In line with the chairs’ intent, low-earners would face very modest tax increases (averaging less than $20), middle-income households would pay about one percentage point more ($600 on average), and the highest earners would pay significantly more (more than $100,000 for the top 1 percent and $700,000 for the top 0.1 percent). These estimates are relative to a current policy baseline that assumes the 2001 and 2003 tax cuts and the Alternative Minimum Tax “patch” are extended and the estate tax reverts to 2009 rules. 

It could be that Professor Hacker opposes President Obama’s position and favors rolling back all of the 2001 and 2003 tax cuts. This is an entirely defensible position, and one that I endorse. Yet it’s also worth noting that Bowles-Simpson raises average rates for high-earners while it reduces marginal rates, as Gleckman has explained.

The Agenda

NRO’s domestic-policy blog, by Reihan Salam.