13 December 2005

Tax Panel Plan Not Revenue Neutral.

The President's Advisory Commission on Tax Reform, whose proposals have been abandoned in the short term by the President and Congress, was supposed to produce a revenue neutral proposal. It didn't. It proposed a massive tax cut. How?

The biggest problem with the report, however, is its assumed baseline. The panel's baseline assumes not only that the recent (2001-2004) tax cuts, which are currently scheduled to expire in 2010 or earlier, are made permanent, but that the proposals in the president's most recent budget are enacted. This baseline choice makes the revenue, distribution, and growth implications of the proposal appear much more favorable than they would be relative to a current-law baseline.

The panel's proposals not only dramatically cut tax revenues compared with current law, but also significantly reduce long-term revenue. To make the proposals revenue-neutral in 2015 relative to current law would require at least a 16% increase in marginal tax rates over those proposed by the panel, or substantially more base broadening. The distributional measures employed in the report can be very misleading, and the panel's claims that the proposals would be distributionally-neutral are less meaningful than might appear.

Through their effect on long-term deficits and national saving, the proposals are as likely to reduce economic growth as to increase it, relative to current law.

One more reason that this report should go straight to "the circular file".

No comments: