The CRFB on the Recent JCT Report on Deficit-Reducing, Rate-Reducing Tax Reform

It is fair to say that Mitt Romney’s call for a 20 percent across-the-board cut to marginal tax rates is impossible to reconcile with preserving revenue neutrality and progressivity. But that isn’t to say that some alternative rate-reducing plan couldn’t work, e.g., a plan that raised taxes on capital income.

Recently, the Joint Committee on Taxation released a report detailing what it would take to create a revenue-neutral reform measured not against a current policy baseline but rather against a current law baseline. Moreover, it ruled out restricting or rolling back the following tax expenditures: the EITC, the child tax credit, the exclusion of employer-sponsored and self-employed health benefits, and the current law treatment of retirement income and pension plans. The report concluded that you couldn’t reduce rates very much once you’ve taken these tax expenditures off the table and you assume that the Clinton-era tax code, plus the tax increases under the Affordable Care Act, would go into effect.

But why would this be surprising? The Committee for a Responsible Federal Budget explains the ways in which the JCT report differs from Bowles-Simpson and Domenici-Rivlin:

* The study is revenue-neutral relative to a baseline in which all the tax cuts from the last decade expire — a policy which neither party supports or measures against. Relative to the more commonly-used baseline, this plan raises taxes by $4.5 trillion over a decade.

* The study only repeals itemized deductions and the preference for newly-issues state and local bonds. It therefore does not account for dozens of additional tax expenditures worth trillions of dollars – including the largest tax expenditure in the code which excludes employer health insurance from taxation.

* The study taxes capital gains at 38 percent, which according to JCT would actually lose revenue. JCT tends to estimate the revenue-maximizing level at about 28 percent.

So yes, if you want to raise taxes by $4.5 trillion relative to current policy, you will have a hard time getting the top marginal tax rate below 38 percent. 

Reihan Salam — Reihan Salam is executive editor of National Review and a National Review Institute policy fellow.

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