Saturday, April 12, 2008

Robert Stein’s Fiscally Neutral and Progressive Reduction in Taxes on Capital Income

Robert Stein and Ramesh Ponnuru have been pushing another supply-side proposal:
The two of us are among the conservatives who have proposed a tax reform that permanently reduces tax rates on capital gains, dividends, and estates, cuts the top income-tax rate and the corporate-tax rate, and abolishes the alternative minimum tax on individuals … Entin makes two objections to the plan. The first is that it raises marginal tax rates for some people. But almost every tax-reform plan raises tax rates for some people. Many supply-siders have long sought a flat tax of 17 percent. That proposal has many excellent features, but it would raise marginal tax rates on most taxpayers. We don’t recall Entin ever raising his voice against the flat tax for that reason. The question to ask about a proposed tax reform is not whether it raises tax rates for anyone, but what its net effect is. Our plan reduces the most damaging marginal tax rates. As under the flat tax, some people will see their rates rise, but the plan as a whole is both pro-growth and pro-family. Entin’s second objection is to the plan’s centerpiece: a large expansion of the child tax credit. We believe the credit should be bigger, should be applied against payroll taxes as well as income taxes, and should be available to all taxpayers (with no high-income phase-outs).

Cactus of Angrybear suggests that their proposal would make the tax system more regressive:
At least they're not delusional, like the tax-cuts pay for themselves crowd, and honest enough not to skirt the issue. But since this tax scheme is intended to help Paris Hilton, if marginal taxes for some people have to be raised, well, its quite likely that the some people who will get a tax hike are going to be more janitor-ish and less Paris Hilton-y. Anything else defeats the purpose of the rest of the tax scheme. Look for a hefty increase in the lower marginal tax brackets.

Cactus also posts a reply from Robert Stein:
The tax reform proposal that Ramesh Ponnuru and I have outlined would be substantially more progressive than the current tax code. It would also be substantially more progressive than the system under President Clinton. This is true whether one uses our framework to lower overall taxes or maintain revenue neutrality. We would enhance progressivity in three ways: First, we would provide a $4,000 tax credit per child that would be refundable versus both payroll taxes and income taxes. Second, although we would reduce the top marginal income tax rate, we would let the new lower rate kick in at a lower level. As a result, people in upper income brackets would end up making much higher overall tax payments despite facing a lower top marginal rate. Third, we would alter the mortgage interest deduction and charitable donation to make it available to more middle and lower income taxpayers (while less generous to the upscale) while getting rid of other itemized deductions that are predominantly used by upper income taxpayers. On net, almost everyone now in the 15% bracket or below would pay less in taxes. For those now in the 25% bracket or above, their aggregate taxes would go up, although (in general) not when they have children ages 0-18, and their top marginal rate would decline.

The rich and the poor both pay less taxes? Wow – this sounds like the George W. Bush tax cut – which was NOT fiscally neutral. I guess one could design such a tax proposal but that would basically be one that screwed the middle class. Here’s my bottom line – reducing taxes on capital income would require increasing taxes on employment income if fiscal neutrality is to be maintained. That sounds regressive to me. Of course, Stein’s claim that his proposal is fiscally neutral appears to be suspect.

We’ve seen supply-siders make these claims before. They often claim that reductions in taxes on capital income can increase tax revenues and benefit the poor. Usually their claims are not supported by a real analysis. If someone knows if anyone has analyzed the Ponnuru-Stein proposal, I’d love to see the results.


Ken Houghton said...

I have no dog in this fight, but note here, as I did at AB, that their "$4,000 tax credit per child that would be refundable versus both payroll taxes and income taxes" is one of those Consume-Now-at-the-expense-of-your-future plans: it reduces the contribution of those making less than (currently) $94,200/year to Social Security—which will reduce their future benefits as well.

I want to see their 75-year and Infinite Horizon plans.

Bruce Webb said...

Ken that is a feature and not a bug of just about every Economic Right economic proposal from consumption tax to flat tax to minimum wage. They always structure it so that the middle class ends up subsidizing the poor out of income taxes while tax on capital gets reduced or eliminated.

They get a twofer each time, tax cuts for Paris Hilton and a class wedge issue driven between the middle and working classes. And where they can they try to go for three by attacking Social Security's revenue stream in an effort to convert it from worker paid insurance to a income taxpayer paid welfare. I have been watching this most of my adult lifetime, conservatives are simply bound and determined to drive the whole idea of social solutions to social problems out of the marketplace of ideas by shifting all the costs of social programs onto the middle class and away from the investor class in an attempt to instigate a taxpayer revolt that will kill off the New Deal and Great Society once and for all. You simply cannot separate most of these tax plans from the general Norquistian drown government in the bathtub scenario.

And then of course all accompanied with crocodile tears about of course they care about regressivity and shouldn't we middle class liberals do too? (At the same time as insisting that poor people don't pay taxes. Whatever is convenient for their particular argument at the time.)

Refundable payroll tax is always and everywhere a Trojan Horse designed to undermine the whole carefully calibrated structure of Social Security. As of course are calls to raise the cap. Each is designed to convert the program from an insurance model to a welfare model where it can be depicted as just another social program that we just (regretfully) can't afford. Yeah right.

BruceMcF said...

I think I am reading a different text than the poster ... it says that all income payers in the aggregate above a certain level of income pay more taxes. Not that they pay less taxes.

There is some allocation inside that group, but lower rate with fewer income deductions can easily translate into a higher effective rate of income tax.

So regarding the explicit claim that in the proposed system, aggregate collections from households above a certain income level, I don't see it in terms of the magic tax receipt elasticity wrt a change in the tax rate being more negative than -1 ... I see it as lowering marginal rates while increasing incidence of taxable income over all income.

Bruce Webb said...

Stein/Ponnuru "The two of us are among the conservatives who have proposed a tax reform that permanently reduces tax rates on capital gains, dividends, and estates, cuts the top income-tax rate and the corporate-tax rate, and abolishes the alternative minimum tax on individuals"

McFarland "I see it as lowering marginal rates while increasing incidence of taxable income over all income."

I must need new glasses, because I know from past experience that this other Bruce is a smart guy, and I just can't see how a combination of a cut in taxes on capital gains, dividends, estates combined with cuts to the top marginal rate and the elimination of AMT has a result of 'increasing incidence of taxable income over all income'.

Unless of course you redefine 'all income' to mean 'all wage income' which indeed seems to be the central thrust of Stein/Ponnuru 'screw, screw, screw the professional class while leaving the investor class alone' (to reword cactus's headline from AB).

Unknown said...

Mr. Webb, you're not getting it. Your analysis strangely omits a key feature of the Ponnuru-Stein plan, which is to scale back deductions, exclusions, and credits that disproportionately benefit upper income taxpayers. (For example, two-thirds of the tax savings from the mortgage deduction go to the top 10%.) There are so many of these tax benefits that riddle the tax code that one can EASILY design a tax reform that cuts marginal rates at the top AND reduces taxes on capital while STILL increasing the average tax burden on high-income taxpayers, reducing the burden on low and middle income, AND achieving revenue neutrality. I think Stein explains that pretty clearly. What about his (correct) math do you not understand?

ProGrowthLiberal said...

George - my post asked if anyone has done a thorough analysis of their proposal. You suggest their math is correct, which I guess means you've seen such an analysis. Could you point us to it so we can review for ourselves whether their plan matches their rhetoric?

Brooks said...

I'm not going to comment on whether their plan would make our tax code more progressive or less, on whether or not that would be desirable, on the economic impact of their plan, or on anything else about their plan (which I haven't even actually read) other than this:

They say it would be a revenue-neutral change, and while perhaps they are just saying that their approach would be preferable at any given level of revenue, I suspect they are saying or implying that we should not be seeking a net tax increase.

It is simply, clearly fiscally irresponsible to keep taxes at their current rates. We are clearly on an unsustainable fiscal course due to the projected growth in entitlements. While theoretically, someone of an extreme conservative or libertarian economic/philisophical view could claim that we should address this imbalance solely through spending cuts (although they really should quantify the magnitude of cuts that would be necessary and think through the severity of impact that would have on seniors and the poor, something most have not done), it is simply politically implausible that that will happen, which means that tax increases are INEVITABLE. Further, the longer we delay tax increases and allow our debt to mount as more and more boomers retire, the greater (and more abrupt and disruptive) the eventual tax increases will be (and I mean greater in present value terms or any other terms -- in other words, bad from a long-term tax burden perspective).

I realize that ONLY increasing taxes could lead to incremental spending, ceteris paribus (although the relationship between tax changes/revenues and spending is a subject of debate among economists), but we need tax increases AND spending cuts, and the longer we wait, the worse the ultimate pain will be. We need to grow up and take our medicine. We need to be fiscally responsible.

Bruce Webb said...

"(For example, two-thirds of the tax savings from the mortgage deduction go to the top 10%.)"

As pgl suggests sourcing is nice. And we might ask how much of that tax savings goes to the top 1%. Do billionaires actually finance their mansions? It is not like deducting their interest and property tax is going to drop them into a lower tax bracket.

A great deal of effort is being made to stick it to the second decile in an effort to benefit the top decile all in an attempt to drive a wedge between the the professional class and the working class.

"There are so many of these tax benefits that riddle the tax code that one can EASILY design a tax reform that cuts marginal rates at the top AND reduces taxes on capital while STILL increasing the average tax burden on high-income taxpayers,"

Insert hollow laugh here. Is Steve Forbes pushing the Flat Tax because he really, really thinks billionaires are paying too LITTLE? You really think Stein and Ponnuru are carrying water for the working class? Those tax benefits in the tax code exist because rich people paid good money to have them exist. The notion that they are pushing tax simplification out of the goodness of their hearts and against their actual financial interest kind of ignores something I like to call 'history'. It is all just another version of trickle down and from experience we know that gentle drizzle is also kind of warm and yellow. Excuse me if I don't willingly go out in the rain.

Bruce Webb said...

"We are clearly on an unsustainable fiscal course due to the projected growth in entitlements."

Another instance of 'tiny fraction'. Brooks you are on record multiple times insisting that you were merely trying to correct a specific conceptual error about the relation between spending and long-term deficits and not in fact focusing on any particular spending program, and certainly not Social Security. Yet you always end up slipping up and admitting that it really is about 'entitlements'. You are really just fundamentally dishonest on this front. Months and months ago you advanced assertions about Social Security finance that several of us showed were simply without basis and since then you have spent months defensively trying to insist that you made no such mistake, that we just missed your point, ignored its actual significance and so on and so on ad (my) nauseum. Arguendo et ceteris paribus.

You are attempting to advance an ideological position under a specious cover of non-partisan inquiry. Well it is not working, you just are not as slick as you think you are.

Brooks said...

Bruce Webb,

Re: your comment (attack, to be precise) addressed to me above:

You are so obviously, incredibly, mind-bogglingly stupid -- as well as so oblivious to that fact that you repeatedly, and aggressively, expose it. The fact that you do so in your efforts to attack someone's (my) integrity without cause makes you not only pathetic, but also annoying and a small part (and example) of the downward spiral of political discourse in America today that is harming our country.

Let me explain, not that I expect you to understand, but others probably will.

The point I was making re: SS on those other threads was indeed a correction of a fundamental conceptual/analytical error people were making. It was not advocacy of any policy position. It was like correcting someone's mathematical error or faulty logic. It had nothing to do with what we should do in terms of policy, as I stated explicitly over and over again. I also said repeatedly that the error was being made by BOTH sides were making this error -- those who wanted to cut projected SS spending and those who wanted to prevent any such cuts.

Do I favor some such cuts, particularly means-testing? Yes, I do. But, first of all, contrary to your assertion that I "always end up slipping up and admitting" this policy preference, I stated it clearly and explicitly from the very beginning on Thoma's blog
. Second, and even more to the point, you nonsensically equate correction of an analytical error with advocacy of a particular policy preference, just because the person making the correction has that policy preference. You are apparently incapable of understanding the distinction. Lastly, you seem to presume nonsensically that if I correct one group of people with a particular policy preference on a conceptual/analytical error they are making, and if I happen not to share their policy preference, then the sole purpose of my pointing out and correcting that error must be to advance the cause of MY preferred policy. Maybe that's the way YOU think and act, Bruce, but not everyone is so consumed with partisanship that it overrides every other consideration, including intellectual integrity, correct logic, accuracy, knowledge over ignorance, an informed public, rational discussion/debate of public policy choices, etc. If I see people making a fundamental error in discussion/debate over an extremely important policy issue, I think it's worthwhile and important to correct that error. Apparently you don't, unless it advances your agenda. Again, that's just YOU.

As I've stated several times elsewhere, I've put in a lot of time trying to convince extreme supply-siders that the Bush tax cuts (and tax cuts on individual income generally) have a net NEGATIVE impact on revenues, as opposed to the myth they hold that "tax cuts increase revenues". On RedState I was attacked by the knee-jerk partisans there in exactly the same way that you've attacked me from the start. Instead of considering my point on its merits, they attacked me. Now, it so happens that I think we DO need to raise taxes, but that doesn't mean that my pointing out there error constituted advocacy of that policy. Get it? Probably not. It also doesn't mean that the only, or even the primary reason I was pointing it out was to advance my policy preference. When I see someone making an obvious error, I point it out and correct them, even -- and this may shock someone with your mindset -- even if they are advocating a policy I FAVOR. It's called integrity and commitment to contributing to an informed public discussing/debating policy rationally. It's quite arrogant to be so sure that you are right on some policy choice that that end justifies all means, and that you would prefer that ignorance or faulty logic be maintained if that were conducive to achieving that policy. Maybe that arrogance is part of your problem, but I don't think so. I think there you're just too stupid to understand a lot of concepts and much of what people are saying, you refuse to engage in direct, substantive exchanges, and you are impervious to corrections of fact and of logic; you just keep repeating the same nonsense no matter how many times your errors are clearly explained to you (case in point, your repeated references to "tiny fraction" as some sort of "gotcha", which is really hilarious. As I've explained my point was that it is simply common sense that an error being made in policy debate over spending on some tiny program is not as worthy of attention and correction as a similar error being made regarding spending on a huge program that is much more consequential for our budget balance. I guess that sense still eludes you). And your stupidity is not something I wouldn't be pointing out, let alone publicly, if you weren't also a real nasty guy and one who epitomizes and contributes to the problem with political discourse today.