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.