The Byzantine, Impossible Tax Reform in the Gang of Six Plan

There’s a lot of confusion over the tax reform piece of the Gang of Six proposal, which relies on a different baseline than the Obama “grand bargain” plan. In Obama’s plan, the Bush tax cuts were assumed to all be extended, and the $1 trillion in revenue gained came in part from eliminating those “high-end” tax cuts, for roughly $800 billion of the $1 trillion figure. How they would accomplish this – with higher rates, or lower rates with more tax breaks – is unclear. But the raising of $1 trillion assumed full expiration. That raises $3 trillion less in revenue than if you just let the Bush tax cuts expire entirely.

The Gang of Six plan is a bit different. It builds into it the assumed expiration of the “high-end” tax cuts for people making over $250,000 a year. Those people wouldn’t pay higher rates – in fact, the rates would be quite lower, with more tax expenditures removed. But the $1 trillion raised would be in addition to that assumption, meaning that the Gang of Six plan would raise far more revenue through its tax reform than the Obama grand bargain.

But that obscures the fact that the Gang of Six tax plan doesn’t really pencil out. They have promised:

• Lower marginal tax rates so that they fall in 3 brackets: one at 8-12%, one at 14-22%, and one at 23-29%;
• The elimination of the alternative minimum tax, which would cost $1.7 trillion;
• Reform but not elimination of the really big tax expenditures, like charitable deductions, the employer health care deduction and the mortgage interest deduction;
• Revenue-neutral corporate income tax reform;
• And yet a grand total of $1 trillion in net revenues, on top of the $800 billion built in from the assumption of the end of the high-end Bush tax cuts.

How in the would do you lower rates, cancel the AMT, get nothing from the corporate side, promise not to nix the biggest tax expenditures, and raise at least $3.5 trillion? That’s the cost of the AMT, $1.7 trillion, plus the revenue raising targets, $1.8 trillion. I’m NOT EVEN COUNTING the money you would have to make up for lowering the individual rates. You’d have to tax Wall Street trades or add a carbon tax to get to that number.

This seems completely impossible and actually doomed to failure. It was part of why Eric Cantor criticized the package, because he didn’t like the revenue raisers. When he gets a load of the numbers, he’s REALLY not going to like it.

If it seems too complicated, that’s because it probably is. Only the mother of all accounting tricks could lead to this tax reform penciling out. It’s far easier to just let the Bush tax cuts expire, all of them, and reach the $4 trillion deficit target that way. Now maybe there are some things that, piece by piece, you could substitute out in exchange: defense cuts for middle-class tax cuts, for example. But that’s essentially PAYGO. Just sticking to the CBO baseline, rather than this opulent tax reform plan that makes no sense in reality, seems preferable. And besides, even rich GOP donors are telling their leadership that they want their taxes increased.

UPDATE: And top Republicans are now walking away from the Gang of Six plan. It raises even more revenue than the Obama grand bargain, so this was always like Bugs Bunny dressing up as a girl to fool Elmer Fudd into thinking he isn’t Bugs Bunny, to use an elaborate metaphor.

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