Would Letting All the Bush Tax Cuts Expire Make Tax Reform Easier?

My great pal Tony Fratto over at Hamilton Place Strategies is talking up the “benefits to allowing my favored Bush income tax rates to expire and return to Clinton-era tax rates for everyone.” While emphasizing the Clinton-era tax code is “suboptimal,” Fratto — a deputy press secretary to President George W. Bush — thinks a reversion would make it easier to eventually accomplish major tax reform. Fratto:

The Obama plan of only raising the top two rates on the wealthiest Americans kills any chance of income tax reform. This is important to understand: tax reform was always going to be a long shot. The forces arrayed against reform are numerous, well-organized, well-financed, dispersed across the country, and are often sympathetic groups: charities, state and local governments, the housing industry, and homeowners, just to name a few.

But tax reform becomes practically and politically impossible if the tax burden is skewed to the top as the Obama plan intends. In fact, the wealthiest Americans will face an even higher top marginal tax rate than under the Clinton years due to the increased Medicare payroll and investment taxes in Obamacare. Tax reform requires creating winners, and the pool of winners has to come from people paying taxes. Those not paying taxes today have absolutely nothing to gain from tax reform. In fact, if we only raise the top two rates, the only people who would gain from income tax reform would be the wealthy. And we can’t help the wealthy, so…no tax reform.

The Clinton tax rates create a much better basis for tax reform because more Americans will actually be paying taxes and can benefit from reform.

Now let me see if I understand this clever bit of political strategery. In other words, you have to give a critical mass of voters some skin in the game. By raising middle-class income taxes today, you could then cut them tomorrow as part of reform that would lower tax rates (at least for them) and broaden the tax base to create a more efficient, pro-growth tax code. “Yes, I am scaling back your housing/healthcare/state and local tax break, but I am also lowering your marginal tax rate.”

Now, Tony is right that the current makeup of the tax code does make it tough to do CBO-approved, revenue-neutral tax reform, as Mitt Romney found out. But I have some concerns/questions/observations (beyond concerns about a nasty 2013 recession):

1. What if Democrats decide to keep the money with no tax reform? All else equal, letting the Bush tax cuts expire would, according to the CBO, give government a gusher of money, an additional $5.1 trillion over a decade.Tax revenue as a share of GDP would average 20.6% from 2013-2012 vs.18.1% if we keep the Bush tax cuts (or about the post-WWII average).

2. With higher tax revenues, wouldn’t any near- or medium-term pressure to do entitlement reform evaporate? While annual deficits might be lower, the Medicare-Medicaid-Social Security debt bomb would still be ticking, and the longer we wait to act, the more dramatic reform will need to be.

3. If you are looking for middle-class, tax-reform sweetener, what about cutting payroll and investment taxes?

I will continue to think about this …

  1. Mel Foil

    Can’t happen. “Bush only cut taxes for the rich.” I heard it said about 500 times, so it must be true.

  2. Aaron Miller

    Republicans should reject any temporary measures. No more extensions. No more loopholes.

    In this way, perhaps Republicans can force voters to consider the tax code as a whole, rather than debating how the mess should be tweaked and tweaked again.

  3. Devereaux

    The debt ceiling is also coming up. They don’t give any meaningful cuts, the ceiling doesn’t go up. Two can play that gaame.

  4. Frozen Chosen

    Obama wants to raise taxes on everybody – he needs the revenue for his socialist plots.  He would much prefer to go over the fiscal cliff than just raise taxes on the top 2% (he will never admit this of course).

    The House should agree to his tax increase on the 2% and then he will have to propose raising taxes on the middle class later in his term, which means Dems take the hit rather than the GOP.  Ugly I know but there just aren’t any good options here…

  5. Scarlet Pimpernel

    Our counter-proposals have to push the ball downfield.  Here are a couple of ideas I posted the other day:

    propose a new AMT. Anyone who earns above, say, $500,000 and pays less than 30% of their income in combined federal, state, and local taxes, shall be subject to an alternative minimum type of tax, to ensure that they are paying up. (Technically, the count would be on their tax rate for money earned in excess of $250,000)

    (The fact is, when we combine federal, state, and local taxes, many rich Americans already pay at that rate. This might help expose that lie.)

    2. Keep the payroll tax cut on everyone making less than $250,000.

    Increase the payroll tax cut for people making less than $50,000. Increase taxes on people making more than $500,000 by eliminating/ reducing deductions popular among those with higher income, but do not raise tax rates. Is President Obama going to oppose a cut for the poor, combined with a tax hike on the very rich, in order to protect K Street?

  6. ConservativeWanderer

    Fascinating. Lose to win.

    I guess then that McCain’s loss in 2008 must have led to Romney’s win in 2012.

    I can’t wait till Romney’s inauguration next month, can you?

    I wonder what Ronaldus Magnus would have said about “raise taxes to lower taxes.”

  7. Nathaniel Wright

    If the tax cuts expire a number of people who currently pay zero taxes will have to start paying taxes.  It’s not hard to believe that those people — for whom $100 is a vital sum — will start complaining something fierce.

    That might just provide some impetus for overall tax reform.  We need to stop using the tax code to pick winners and losers.

  8. ConservativeWanderer
    Nathaniel Wright: If the tax cuts expire a number of people who currently pay zero taxes will have to start paying taxes.  It’s not hard to believe that those people — for whom $100 is a vital sum — will start complaining something fierce.

    That might just provide some impetus for overall tax reform.  We need to stop using the tax code to pick winners and losers. · 0 minutes ago

    No offense, Mr. Wright, but I’ve heard similar sentiments for the last four years.

    • “They elected Obama? Well, four years of his over-the-top leftism and they’ll be ready to elect a Republican in 2012.”

    • “They passed ObamaCare? Well, living with that hanging over their heads will make it easier for the GOP to win in 2012.”

    And so on.

    Honestly, I even believed those predictions.

    Then reality slapped me in the face on a cold November Tuesday.

    Now, I believe that as long as they get their Obamaphones, the sheeple of America will continue to vote for big-government socialists.

  9. ConservativeWanderer

    Not to mention, this plan presupposes that the low-information no-tax voter will blame Obama and the Democrats for whatever pain they feel.

    I’m not convinced.

    Obama will get on Here Comes Honey Boo-Boo and declare that those evil Republicans have done things (exactly what will remain unspecified) that are hurting the 99%, and the average Obamaphone voter will believe him.

  10. Scarlet Pimpernel
    ConservativeWanderer:  Obama will get on Here Comes Honey Boo-Boo and declare that those evil Republicans have done things (exactly what will remain unspecified) that are hurting the 99%, and the average Obamaphone voter will believe him. · 9 minutes ago

    That’s why the Republicans should propose a further cut in the payroll tax for the poor and the lower middle class, keeping the tax cut for the middle class, and raise taxes on the rich by ending or limiting deductions.

  11. ConservativeWanderer
    Scarlet Pimpernel

    ConservativeWanderer:  Obama will get on Here Comes Honey Boo-Boo and declare that those evil Republicans have done things (exactly what will remain unspecified) that are hurting the 99%, and the average Obamaphone voter will believe him. · 9 minutes ago

    That’s why the Republicans should propose a further cut in the payroll tax for the poor and the lower middle class, keeping the tax cut for the middle class, and raise taxes on the rich by ending or limiting deductions. · 1 minute ago

    And Obama would declare that it was his idea, and the leftistmedia will echo it (especially since the earlier payroll tax holidays were, if memory serves, the Democrats’ ideas), and the low-information voter again will believe him.

  12. Scarlet Pimpernel

    Obama probably would oppose it. He is focused on higher tax rates, rather than more revenue just now.  But combine ending loopholes with a cut for poorer people, he might have trouble vetoing it.

    And the Dems don’t want to extend the payroll tax cut for the reasons outlined above.  They don’t want to expose the lie that it is a self-financed pension.

  13. ConservativeWanderer
    Scarlet Pimpernel: Obama probably would oppose it. He is focused on higher tax rates, rather than more revenue just now.  But combine ending loopholes with a cut for poorer people, he might have trouble vetoing it.

    And the Dems don’t want to extend the payroll tax cut for the reasons outlined above.  They don’t want to expose the lie that it is a self-financed pension. · 2 minutes ago

    No, Obama would support it, publicly.

    He’d tell Harry Reid to kill it in the Senate.

    He gets the best of both worlds.

    Trust me, the low-information voter is completely lost to any conservative candidate for at least the next 30 years. The Democrats are giving them too many “free” things, and the media is trumpeting those “freebies.”

  14. Adam Koslin

    Amen, Mr. Pethokoukis.  Amen.

  15. Fake John Galt

    Lets just round the rich up, shoot them, and take everything they own. Then maybe we can get some peace and quiet to resolve this issue in.

  16. ConservativeWanderer
    Fake John Galt: Lets just round the rich up, shoot them, and take everything they own. Then maybe we can get some peace and quiet to resolve this issue in. · 1 minute ago

    That includes a lot of the Democrats in Congress, too.

  17. Fricosis Guy

    Finally, some sense here.  If the GOP weren’t been so dense it could turn this around by framing the discussion as “Gee, if the Clinton tax rates were so good let’s have them all back!”

    BTW, if Ronaldus Magnus is rolling in his grave it is because people equate his permanent tax cuts and reforms to the temporary tax crack George Bush and the DeLay/Hastert/Lott gang got us hooked on.  Sucks when the Keynesian pipe gets pulled away. 

    Kudos to Tony Fratto for manning up.  The Bushies knew the hikes were coming when settled for temporary cuts…nice to see at least one admit it.

    Aaron Miller: Republicans should reject any temporary measures. No more extensions. No more loopholes.

    In this way, perhaps Republicans can force voters to consider the tax code as a whole, rather than debating how the mess should be tweaked and tweaked again. · 2 hours ago

  18. Brian Skinn

    James, the gusher of money will never come, so I wouldn’t worry about that.  If historical precedent is any indication, if we do go straight off the cliff, productivity will tighten up right quick and the revenue increases will be far short of predictions.  My money would be on the increase being no more than 35% of predictions.

  19. ConservativeWanderer
    Brian Skinn: James, the gusher of money will never come, so I wouldn’t worry about that.  If historical precedent is any indication, if we do go straight off the cliff, productivity will tighten up right quick and the revenue increases will be far short of predictions.  My money would be on the increase being no more than 35% of predictions. · 9 minutes ago

    Which would then lead to the Obamacrats printing more money, and voila, America becomes the Weimar Republic.

  20. BrentB67
    Scarlet Pimpernel

    ConservativeWanderer:  Obama will get on Here Comes Honey Boo-Boo and declare that those evil Republicans have done things (exactly what will remain unspecified) that are hurting the 99%, and the average Obamaphone voter will believe him. · 9 minutes ago

    That’s why the Republicans should propose a further cut in the payroll tax for the poor and the lower middle class, keeping the tax cut for the middle class, and raise taxes on the rich by ending or limiting deductions. · 1 hour ago

    Sure, because the tax code isn’t progressive enough already and having fewer people with skin in the game will unite the country.

    I think we should try the opposite. Eliminate all the tax code gimmicks so the first$ is taxed and everybody is paying in. Then we can start having real discussions about the size of government, but when you 25% of the people paying more than 75% of the tab it isn’t going to happen. Concentrating the tax even farther up the income scale doesn’t solve anything.