As regular readers know, I’m a bigger fan of the Bowles-Simpson Chairmen’s Mark than most conservatives. Though the plan wasn’t as specific as one might like in every regard, it addressed defense expenditures and Social Security in a fairly serious way. My favorite aspect of the proposal was its call for radically paring back tax expenditures, a minor obsession of mine. On this front, Bowles-Simpson proved far more explicit and, dare I say it, bold than Chairman Ryan’s PTP. Though the Bowles-Simpson tax reforms are designed to be revenue-positive, they’re also geared towards reducing marginal tax rates. Note that reducing marginal tax rates needn’t amount to reducing effective tax rates, particularly for households in high-tax jurisdictions with high housing costs, like the suburbs of the largest coastal metropolitan areas.

There is a clear virtue to this approach that Tim Kane explains in a post at The Huffington Post:

[T]he taxes entrepreneurs fear most are not corporate, since many startups these days are sole proprietorships or Limited Liability Companies (LLCs). They pay individual taxes, the good old 1040, not corporate taxes. More often than not, they’re paying the top marginal rate.
The theory is that when the top marginal tax rate goes up, entrepreneurship goes down. In 2000, Glenn Hubbard and Bill Gentry examined tax records and found that higher progressivity lowers the probability of an individual choosing entrepreneurship over corporate employment. A year later, Bob Carroll and co-authors found that entrepreneurial profits were lower in states with higher marginal tax rates.
Over the last couple of years, I’ve been conducting economic experiments to see if progressive taxes affected entrepreneurial behavior, and early (unpublished) results confirm the empirical studies, with a surprising twist: Making taxes more progressive (that is, raising tax rates on the rich while lowering them for everyone else) lowers the incentive for people to take risks that might make them rich. But the surprise was that higher flat-rate taxes had no effect on entrepreneurial behavior.
The facts point to a solution sure to please no one. Taxing the rich will hurt the economy, but raising taxes on everyone won’t. The implication is that Congress could adopt a flat tax with a relative high rate and actually enhance job creation while helping to balance the budget.

Note that this is the chief political argument that has been deployed against the rough outline for tax reform in the PTP. The Bowles-Simpson proposals don’t recommend a single-rate tax, but they generally back reducing the number of brackets and make the tax code less steeply progressive than it is at present. This accounts for much of my enthusiasm. Among other things, my guess is that something like the Bowles-Simpson “Zero Plan” would reduce compliance costs, improve work incentives, spur entrepreneurship, and improve long-run economic growth. I would like to see capital income treated more generously, but that would be politically very tough.

The moderately left-of-center Progressive Policy Institute has just published “Less is More: The Modified Zero Plan for Tax Reform” by Paul Weinstein Jr. and Marc Goldwein, a useful contribution that explains the virtues of the Zero Plan approach while also offering a modified version that aims to meet the objections of egalitarian critics. I don’t like the modified plan as much as the original, but it strikes me as an approach I could live with.

I’m not sure that I could embrace President Obama’s departures from the Bowles-Simpson approach quite so enthusiastically. News reports suggest that the president intends to embrace Bowles-Simpson, and there have been predictable, and plausible, objections ringing from critics on the left who maintain that the president is negotiating with himself. But early reports suggest that the president’s approach to taxes will have almost none of the virtues of the Bowles-Simpson Zero Plan. The Los Angeles Times, not a paper I rely on as a general rule in light of its colorful interpretations of national political news, reports the following:

Obama would end tax breaks for households earning more than $250,000 a year, trim Pentagon spending, lift a cap on the amount of income that is assessed for Social Security, and save on Medicare and Medicaid through alterations to healthcare delivery, administration officials said.

As much as I love trimming defense expenditures, I’m discouraged by these tax proposals. Charles Blahous has explained the risks inherent in lifting the cap on wages subject to the Social Security payroll tax and it’s far from clear that exempting under-$250,000 households makes much sense, particularly since it is over-$100,000 households that benefit the most. The president has decided, for reasons that aren’t clear, to protect the status quo for $100K-100K families rather than to move away from micromanaging tax expenditures full stop.

I suppose we’ll see how this all plays out tomorrow.