Politics: National Security

Separated at Birth: Merkel and Clinton

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June 7, 2011, 10:34 a.m.

Gov. Jim Gib­bons (R) “still hos­pit­al­ized after break­ing his pel­vis in a horse rid­ing ac­ci­dent last month, plans to par­ti­cip­ate by phone” in a Board of Ex­am­iners and Board of Trans­port­a­tion meet­ing 10/12.

Gib­bons spokes­per­son Daniel Burns: “I’ve seen him every day, and he gets a little bet­ter every day. They still have him on a rig­or­ous pro­gram of re­hab. We don’t know when he’s go­ing to get out. When you’re in the hos­pit­al, the doc­tors tell you how long you’re go­ing to stay. He’s do­ing everything he can to get his re­hab done, get out of the re­hab cen­ter and get back to the Gov­ernor’s Man­sion as fast as he can” (Reno Gaz­ette Journ­al, 10/7).

Burns “said Gib­bons was able to move around in a wheel­chair” 10/6 (Vo­gel, Las Ve­gas Re­view-Journ­al, 10/7).

COR­REC­TION: The print ver­sion of this column gave an in­cor­rect num­ber for how much rev­en­ue Pres­id­ent Obama’s Buf­fett Rule ap­proach would raise—it would bring in about $520 bil­lion over the next dec­ade. 

The Buf­fett Rule is dead. Long live the Buf­fett Rule.

A Sen­ate Re­pub­lic­an fili­buster this week killed the so-called Buf­fett Rule, Pres­id­ent Obama’s pro­pos­al that mil­lion­aires pay at least 30 per­cent in fed­er­al in­come taxes. It died de­rided by its crit­ics as class war­fare and mourned only mod­estly by its sup­port­ers, many of whom ap­plauded the prin­ciple but con­sidered it something of a sideshow be­cause it would have raised re­l­at­ively small sums.

Yet if Con­gress re­forms the tax code next year, it will likely take in­spir­a­tion from one of the pro­pos­al’s core in­sights. The Buf­fett Rule looked to stream­line the code not by re­peal­ing in­di­vidu­al tax breaks but by mak­ing all of those loop­holes less valu­able to af­flu­ent tax­pay­ers. Rather than re­du­cing the sup­ply of spe­cial tax breaks, the Buf­fett Rule would re­duce the de­mand for them. If the next Con­gress and pres­id­ent are to suc­ceed at lower­ing rates and rais­ing rev­en­ues by sim­pli­fy­ing the code, they will likely need to fol­low that strategy as well.

In both parties, broad in­terest now ex­ists in flat­ten­ing the tax code. Spe­cial ex­clu­sions, cred­its, and de­duc­tions re­duce fed­er­al rev­en­ue by about $1 tril­lion an­nu­ally, with that sum ex­pec­ted to rise to $1.5 tril­lion by 2016.

Some eco­nom­ists dis­like tax ex­pendit­ures be­cause they dis­tort de­cision-mak­ing (for in­stance, by en­cour­aging people to spend too much on hous­ing). Oth­ers op­pose them be­cause their be­ne­fits skew heav­ily to­ward the wealthy. Tax­pay­ers in the 15 per­cent brack­et save 15 cents on each dol­lar they can de­duct in, say, mort­gage in­terest; those in the top brack­et save 35 cents. Few out­side the top fifth of highest-earn­ing fam­il­ies even file re­turns with item­ized de­duc­tions that al­low them to be­ne­fit from most of these breaks.

The res­ult is that two-thirds of the be­ne­fits from all tax ex­pendit­ures in 2011 flowed to the top fifth of earners, ac­cord­ing to the Tax Policy Cen­ter; the top 1 per­cent alone (with in­comes above $533,000) col­lec­ted nearly one-fourth of all sav­ings. That’s an av­er­age of nearly $220,000 each. By con­trast, the group cal­cu­lated, these breaks re­duce taxes by only about $2,000 on av­er­age for fam­il­ies in the bot­tom 60 per­cent of earners. “It is com­pletely up­side down,” says Le­onard Bur­man, a Syra­cuse Uni­versity pro­fess­or of pub­lic ad­min­is­tra­tion. “If you are in the 10 or 15 per­cent brack­et, you’re not get­ting much of a sub­sidy. But if you are in the 35 per­cent brack­et you’re get­ting a really big sub­sidy.”

If Wash­ing­ton spent less on those tax ex­pendit­ures, it could re­duce in­come-tax rates and also gen­er­ate sig­ni­fic­ant rev­en­ue for de­fi­cit re­duc­tion. With only slight vari­ations, a suc­ces­sion of bi­par­tis­an com­mis­sions and ini­ti­at­ives, from the Simpson-Bowles and Domen­ici-Rivlin de­fi­cit-re­duc­tion pan­els to the Sen­ate “Gang of Six” have em­braced that ap­proach.

Even the private budget ne­go­ti­ations last sum­mer between Pres­id­ent Obama and House Speak­er John Boehner ex­plored this concept. No mat­ter which party con­trols the White House or Con­gress next year, it’s likely that Wash­ing­ton will pur­sue tax sim­pli­fic­a­tion (al­though Re­pub­lic­ans might seek to use all of the res­ult­ing rev­en­ue to cut rates rather than to also re­duce the de­fi­cit, as Demo­crats would de­mand).

The ques­tion is how best to ad­vance that cause. Tra­di­tion­ally, most re­formers have fo­cused on re­trench­ing or elim­in­at­ing in­di­vidu­al de­duc­tions. (Mitt Rom­ney hin­ted at that ap­proach in his over­heard fun­draiser speech last week­end.) But that kind of house-to-house le­gis­lat­ive com­bat is very dif­fi­cult be­cause power­ful con­stitu­en­cies like home build­ers pro­tect all of the ma­jor tax breaks. Among the most ex­pens­ive are the breaks for em­ploy­er-provided health care and pen­sions; the mort­gage-in­terest de­duc­tion; and de­duc­tions for state and loc­al taxes and char­it­able dona­tions.

Head-on as­saults against any of those would prob­ably end like Gal­lipoli. “Go­ing de­duc­tion by de­duc­tion is a path to in­san­ity,” says Steve Bell, seni­or eco­nom­ic ad­viser at the Bi­par­tis­an Policy Cen­ter and who was a Re­pub­lic­an staff dir­ect­or for the Sen­ate Budget Com­mit­tee. “It won’t work.”

The al­tern­at­ive is the Buf­fett Rule ap­proach: cap­ping the total value of the de­duc­tions for tax­pay­ers earn­ing above some spe­cified level. Sep­ar­ate from his Buf­fett plan, Obama has pro­posed to lim­it the value of most tax breaks to 28 per­cent. That would clip tax­pay­ers in only the top two tax brack­ets and raise about $520 bil­lion over the next dec­ade. The Con­gres­sion­al Budget Of­fice cal­cu­lates that lim­it­ing the value of tax breaks to 15 per­cent would raise $1.2 tril­lion over that peri­od (while af­fect­ing a broad­er pool of about one in four tax­pay­ers). Mar­tin Feld­stein, the chair­man of the Coun­cil of Eco­nom­ic Ad­visers in the Re­agan ad­min­is­tra­tion, has coau­thored a plan that would raise much more by cap­ping the total value of de­duc­tions as a share of in­come for all tax filers.

This de­mand-side ap­proach wouldn’t elim­in­ate polit­ic­al op­pos­i­tion to sim­pli­fic­a­tion. But it could make re­form more likely by shift­ing the de­bate from the mer­its of each tax break to their cu­mu­lat­ive im­pact. That in­sight de­serves to live on, even as the Buf­fett Rule re­cedes.

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