Politics & Policy

CAP TAX-REFORM TAKE TWO

John Tamny’s review of the Center for American Progress’s tax plan (“Podesta’s Backwards Tax-Reform Plan“) is a mixed-up critique using tired, discredited, supply-side rhetoric.

First, the piece grossly mischaracterizes our reform plan which is based on three key principles we believe most Americans would embrace: a commitment to fairness, rewarding hard work, and the belief that the best tax system is the one that is easy to understand.

Let’s start with at least one factual inaccuracy in Tamny’s commentary. In our plan, the employee side of the Social Security payroll tax is not shifted onto employers as Tamny suggests. Rather, our plan removes the employee side altogether, giving all workers an immediate 6.2 percent tax cut on the first $90,000 of their wage income. We would urge him and all interested readers to examine the details of the plan.

Tamny is correct that the Center for American Progress tax plan increases the tax rates on wealthier Americans — it is these taxpayers that can best afford to pay and that have benefited the most from the Bush tax policies. Overall, however, our plan reduces taxes on about 70 percent of those making less than $200,000 a year, while at the same time modernizing and streamlining the tax system to promote economic growth and opportunity.

Tamny’s main argument against the tax plan and the marginal increases for those at the top seems to be that we are somehow “naïve” for thinking that this would raise revenue, and that history somehow shows that lower tax rates lead to more revenue. Even the head of the president’s Council of Economic Advisors, Greg Mankiw, disagrees with this view — in his widely-read textbook he states that there is “no credible evidence” that “tax revenues … rise in the face of lower tax rates.” The 2003 Economic Report of the President also recognizes this point, stating that, in response to a tax cut, the economy “is unlikely to grow so much that lost revenue is completely recovered by the higher level of economic activity.”

Furthermore, when independent organizations — from the Joint Tax Committee to the Congressional Budget Office to the OECD — analyzed the so-called “dynamic” impact of the Bush administration’s tax changes, they found that the cuts would have a negligible impact on economic growth.

Tamny is simply recycling old, baseless, supply-side rhetoric from the early 1980s, and torturing the data to make his point. No credible economist makes these kinds of claims about the U.S. tax code anymore — but there are still some people out there who adhere to what George H. W. Bush called “voodoo economics.”

Our tax plan would make the tax system fairer by equalizing the taxation of work and wealth income. By taxing work income at a greater rate than income derived from wealth, our current system unfairly burdens middle-class workers in order to give tax handouts to the very wealthy. In addition, our plan would raise $500 billion over 10 years to reduce the deficit, and provide greater opportunities for millions of Americans to save and create wealth. Overall, our plan embodies a progressive economic growth strategy that will restore fiscal discipline, invest in our people, and expand savings and opportunity that will strengthen and grow the middle class.

Finally, despite Tamny’s knee-jerk reaction to progressive reform, our tax plan contains features that conservatives should embrace. The tax code ought to be less complicated, and should level the playing-field for workers and businesses alike. Under President Bush, the tax code and related regulations have increased by 10,000 pages. Unless you are a tax attorney, this is not a positive development. And you can be sure that not all businesses are treated alike as a result of these changes — corporate lobbyists are more active than ever.

In addition, by reforming the system and cutting loopholes, we would remove the alternative minimum tax (AMT) in a fiscally responsible manner. This is particularly significant as the reach of the AMT has significantly increased as a result of tax policies of the Bush administration, further burdening the middle class. We also include an incentive for long-term savings by exempting half of capital gains from taxation if held for more than 5 years (with smaller exemptions for assets held for shorter periods) for those earning less than $1 million per year.

Changes to the tax code over the past 4 years have been a disaster. The tax system has become a mess from top to bottom, and needs comprehensive reform that moves in a progressive direction — one that leads to a stronger economy and a more vibrant middle class. We can’t afford to follow more of the same, tired policies based on old, discredited economic theories.

John Podesta

Center for American Progress

John Tamny replies: John Podesta seems to suggest that he either hasn’t read my NRO Financial piece, “Podesta’s Backwards Tax-Reform Plan,” or doesn’t understand what exactly his Center for American Progress (CAP) is proposing.

Podesta notes a “factual inaccuracy” in my commentary, in particular the statement that the CAP plan would shift “the employee side” of Social Security “onto employers.” However, on page 11 of the CAP plan, the authors “propose removing the cap on payroll taxes paid by employers.” While the CAP proposal for zeroing out the employee portion of the FICA tax is a laudable goal, raising the employer cost of hiring will simply mean that fewer workers will be hired. The CAP plan’s payroll “tax cut” will be pretty meaningless if it results in fewer workers on payrolls.

In defending the plan’s income-tax proposal, Podesta correctly points out that “wealthier Americans” have “benefited the most from the Bush tax policies.” But he misses the fact that since “wealthier Americans” pay most of the taxes, any marginal rate cut is always going to disproportionately benefit them.

Podesta cites Gregory Mankiw’s “widely read textbook,” which theorizes about tax cuts and asserts that there “is no credible evidence that tax revenues rise in the face of lower rates.” To steal a word from Podesta, citing the theories postulated in Mankiw’s book is a “tired” tactic used by the Left whenever the actual historical impact of income-tax rate cuts prove not to their liking. As Ronald Reagan once said, “facts are stubborn things.” In fairness to Podesta, it would have been impossible for him to directly address the facts my article presented. To have done so would have forced him to acknowledge that the CAP tax plan will achieve the exact opposite of what it suggests.

In his defense of the plan’s capital-gains proposal, Podesta apparently couldn’t locate a textbook written by a Bush appointee that would endorse raising the rate. Instead he inserts the absurd notion that work income is somehow different from “income derived from wealth.” This distinction might surprise the millions of Americans who have worked long hours to amass the wealth that they’ve subsequently invested.

Importantly, my piece applauded the CAP plan’s proposal to abolish the AMT and reduce corporate tax loopholes — both needed simplifications of the current tax system. Unfortunately, the revenue shortfall that would eventually materialize (particularly due to the capital-gains rate changes) if the CAP-proposed tax hikes were enacted would make true simplification an even more distant dream.

For its many negative consequences, the Center for American Progress’s tax-reform plan should once again be avoided at all costs.

Members of the National Review editorial and operational teams are included under the umbrella “NR Staff.”

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