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Unclouding The Actual Debate on Tax Rates

If you listened to the traditional media organs, they’ll tell you that we’re starting to see points of congruence on taxes at the academic, opinion leader level of both parties. Don’t believe them.

At first glance, for example, Romney economic advisor Glenn Hubbard endorsing higher taxes on the rich suggests a white flag of surrender being raised, and that John Boehner is simply bluffing about his vow to keep tax rates the same, if not lower. But let’s look closer.

…The first step is to raise average (not marginal) tax rates on upper-income taxpayers. Revenue increases should first come from these individuals. This means closing loopholes. For instance, the Bowles-Simpson commission, which Mr Obama established, has proposed limiting tax preference benefits for upper-income households. Also, Martin Feldstein of Harvard University and Maya MacGuineas of the Committee for a Responsible Federal Budget have suggested caps on the amount of deductions relative to a taxpayer’s income. These ideas are good places to begin.

It’s not a call for increasing tax rates whatsoever; it’s an explicit call against that. Rather, Hubbard wants to close loopholes and cap deductions. In other words, Romney’s chief economic advisor wants to implement a version of Romney’s tax plan. No big news here.

But where do the two wings of the Democratic Party stand? Here’s Robert Rubin:

Raising tax rates for those with the highest incomes challenges the supply-side proposition that even moderately higher rates would hurt growth. President Bill Clinton’s 1993 deficit reduction plan increased income tax rates for roughly the top 1.2 percent of incomes. Opponents said this would lead to recession. Instead, we had enormous job creation and the longest economic expansion in our history.

A recent report by the Hamilton Project, an economic policy project on whose advisory council I serve, reviewed 23 studies of the impact of tax-rate changes on the propensity to work and found that most of them concluded there was no meaningful effect. Tax expenditure reductions, on the other hand, will not raise nearly the revenues needed for sufficient deficit reduction without increasing taxes on the middle class significantly and are likely to disrupt important social and economic goals, though many economists don’t acknowledge that.

When you compare raising the marginal rates for roughly 2 million Americans to phasing out health insurance exclusions that would affect 150 million Americans — even if some reform should be done — I don’t think it’s a close call substantively or politically.

This is Bob Rubin sounding like Robert Reich with his opening bid. Obviously Reich goes further – raise top tax rates beyond the Clinton baseline, put a surtax on wealth on the top 0.5%, increase capital gains taxes AND cut tax expenditures that amount to corporate welfare. Rubin wants safety net cuts, while Reich does the entire deficit reduction on the tax side. But at the level of tax rates, there’s congruence between these two separate wings of the party, and a real contrast with what Hubbard is shoveling. And note that Rubin also wants short-term stimulus and a trigger, before which no deficit reduction occurs until the economy can support it.

So if the Democrats then go ahead and freeze tax rates, adding revenue – temporarily, as all closed loopholes can open again – through deduction caps or tax expenditure cuts, you then have a situation where they would be endorsing tax policy to the right of Robert Rubin.

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David Dayen

David Dayen