Governor Romney has proposed cutting federal income tax rates by 20 percent, and paying for this by removing various loopholes and deductions. The math doesn’t add up, which is a problem. Even if the revenue numbers did work, “broaden the base, lower the rates” provides a seductive but poor guide to tax policy. The approach is appealing. It brings back memories of the 1986 tax reform, a high point of policy-wonk legislative excellence. In its time, that bill was a genuine triumph of bipartisan policymaking to improve tax policy. Every competent microeconomic student should be able to explain why the deadweight loss associated with taxes is reduced when one can impose low rates on a broad base of income.
Unfortunately, that approach provides a poor guide for today. The fruit is less ripe for the picking. Today’s marginal tax rates are lower than they were a quarter-century ago. Moreover, even if one managed to broaden the tax base, various loopholes and deductions for individuals and corporations would find their way back into the tax code. That’s exactly what happened to the 1986 tax reform. It was well-crafted as a piece of static policy. It was not well-designed to mobilize friendly constituencies or to construct institutional defenses that would make that worthy law politically sustainable.
Perhaps a transparent dollar cap on deductions–the most interesting policy idea Romney has proposed–would work better. Yet as Eric Patashnik’s terrific book Reforms at risk: What happens after major policy changes are enacted makes clear, the overall approach pursued in 1986 politically unravelled. The most likely outcome today would be to lower the rates, and then to gradually allow new tax breaks into the code, balloon the deficit, and frame political debate around the idea that marginal tax rates must be as low as possible.
As Tim Noah observes here, we need to raise taxes, not reform them. Since I’m not running for anything, I can announce a politically DOA tax plan. Let’s put in a dollar-cap on deductions and exemptions for items such as health insurance coverage. And then let’s just stop there. We need the money.
[Cross-posted at The Reality-based Community]