Is it possible to cut individuals’ federal income tax rates by any meaningful amount without also contributing to the U.S. deficit? A new report from the Joint Committee on Taxation (JCT), a nonpartisan committee of Congress, shows how difficult this likely would be.
Repealing some of the largest tax deductions currently allowed in the tax code, like the mortgage interest deduction, as well as the interest exclusion on state and local bonds issued after 2012, while also taxing capital gains as ordinary income, would allow for only a four percent rate cut if the changes were to be roughly revenue-neutral, the JCT found. So, rather than federal income tax rates of 15, 28, 31, 36 and 39.6 percent for 2013 and beyond, individual tax rates would drop just slightly, to 14.4, 26.88, 29.76, 34.56 and 38.02 percent. Not enough to really change most taxpayers’ standard of living.
That’s not to say no taxpayers benefit under the JCT’s scenario. Lower income households generally come out ahead, although the benefits shrink as income levels head up. For instance, in 2013, those making $20,000 to $30,000 would see their average tax rate cut from 8.1 percent of income to 6.6 percent.
In his letter to Congress, the JCT’s Thomas Barthold described the analysis as an “experiment.” That is, the analysis rests on a number of assumptions that may or may not find their way to any tax reform that’s enacted.
Not surprisingly, the conclusions prompted both cheers and jeers. “This report from Congress’ official scorekeeper highlights what has become increasingly clear: the Republican tax plan would either raise taxes on middle class families or further explode the deficit,” stated Sander Levin, ranking member of the Ways and Means Committee, and a Democrat from Michigan. Levin presumably was talking about Mitt Romney’s proposal to reduce individual marginal income tax rates across-the-board by 20 percent, while also balancing the budget.
Others commented on assumptions in the JCT’s methodology that warrant greater consideration. The Christian Science Monitor noted that repealing the AMT, as the JCT analysis does, consumes nearly $1 trillion over the next decade. At the same time, the JCT analysis didn’t forecast any modifications to several significant tax provisions, such as the exclusion for employer-provided health benefits, as well as the present favorable tax treatment of various retirement and pension plans.
Alice Rivlin and former Senator Pete Domenici, now co-chairs of the Bipartisan Policy Center, along with Alan Simpson and Erskine Bowles, of the National Commission on Fiscal Responsibility and Reform, released a joint statement in response to the JCT’s analysis. Noting that current tax deductions, credits and other preferences currently total more than $1.1 trillion annually, they write, “The fact that rates cannot be lowered as much if large tax expenditures are left unaddressed and if most of the savings from those that are eliminated are put towards deficit reduction illustrates a tradeoff, but does not surprise anyone who has worked with tax estimation.” The statement also notes that the JCT analysis looks at a subset of the tax provisions many other deficit reduction proposals reformed or eliminated.
That’s not to say that reforming the tax code to make it fairer and simpler, without piling on to the current $16.2 trillion that the U.S currently owes its creditors, is impossible. The kicker, of course, is that lawmakers need to be willing to make difficult choices. And, voters need to be realistic about the risks of continuing on our current course, as well as the changes that might be needed to change things.