The Agenda

A Modest Proposal on the High-Income Rate Reductions

As Josh Barro noted below, the $700 billion in high-income rate reductions offer more economic bang-for-the-buck than the over $3 trillion in middle-class tax cuts. Alan Viard of AEI has written on a related theme, as we’ve discussed:

It clearly is possible to fashion a package that extends most or all of the high-income rate reductions along with some of the middle-class tax cuts while keeping the total revenue loss at, or even well below, the level that the administration views as acceptable. Some factor other than the deficit explains the administration’s unwillingness to extend the high-income rate reductions. [Emphasis added.]

If we choose not to reform the tax code, a terrible decision in my view, it certainly seems as though we’d be better off extending the high-income rate reductions and not the middle-income rate reductions. As Josh writes,

It is the rest of the tax cuts (lower marginal rates in the bottom four brackets, marriage penalty relief, the higher per child tax credit, etc.) that do not stimulate enough economic activity to offset the added debt burden.

One possible approach would involve rolling back the lower marginal rates in the bottom four brackets while creating an even higher per child tax credit, in keeping with Rob Stein’s argument that we should treat the expenses associated with child-rearing as an investment in human capital. I imagine Josh might object to this approach, but insulating families with children would certainly make for a stronger political case.

Back to Viard for a moment:

As explained below, the high-income rate reductions provide much greater incentive for investment and other economic activity, relative to revenue loss, than the middle-class tax cuts. The expiration of the former and extension of the latter therefore combine much of the disincentive effects of full expiration with much of the deficit increase of full extension.

Cutting the federal budget will prove very difficult, as Josh has explained in his latest RealClearMarkets column. It seems likely that we’ll have to raise the overall tax burden at some point over the next decade to avoid a public debt explosion, if only as a transitional step while we make a sustained effort to curb increases in mandatory spending. It would be short-sighted in the extreme to raise revenue in the most economically damaging way rather than the least economically damaging way, e.g., by increasing taxes on consumption. 

To get a sense of how we might do that, I recommend perusing the recommendations of President Bush’s 2005 advisory panel on tax reform.

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