Why broadening the tax base is so difficult
Increasing revenue from taxes will be difficult if the government can't touch a few common tax expenditures. But there are a few things that qualify for tax breaks that we can do without
Increasing revenue from taxes will be difficult if the government can't touch a few common tax expenditures. But there are a few things that qualify for tax breaks that we can do without
The Congressional Research Service has released a new聽report by Jane Gravelle and Thomas Hungerford called 鈥淭he Challenge of Individual Income Tax Reform: An Economic Analysis of Tax Base Broadening.鈥澛� In a nutshell, the report could be called 鈥淏ase Broadening Is Hard to Do.鈥澛� The Washington Post鈥檚 Lori Montgomery聽summarized it nicely on Friday, including getting this Republican staffer鈥檚 reaction to it:
The CRS report emphasizes that although the 200+ tax expenditures under the federal income tax (individual and corporate) are worth over $1 trillion per year, the largest 20 of them represent 90 percent of that revenue loss.聽 When you look closely at that 鈥渢op 20鈥� list, copied here from the table in the CRS report, it is easy to get discouraged about the prospects for substantial tax base broadening.聽 As I explained last November in Tax Notes (subscription-only access here), the largest tax expenditures look a lot more like 鈥渆ntitlements鈥� than 鈥渓oopholes鈥�:
And that鈥檚 why the CRS authors conclude that 鈥淚t appears unlikely that a significant fraction of this potential revenue could be realized.鈥� Instead of the more than $1 trillion that could be gained if all tax expenditures were eliminated鈥搘hich would support substantial marginal tax rate reductions including getting the top rate down from 39.6% to 23%鈥搕hey believe 鈥渋t may prove difficult to gain more than $100 billion to $150 billion in additional tax revenues through base broadening.鈥�
I think I鈥檓 slightly more optimistic than CRS, because their conclusion assumes we can鈥檛 touch (at all) those top 20 tax expenditures.聽 I think we could actually do better.聽 For example, in his latest budget the President himself has proposed to touch (or hammer?) a lot of these tax expenditures by limiting the benefit of those tax expenditures to the richest households to the levels of benefits that would be obtained at lower marginal tax rate brackets.聽 It鈥檚 an ambitious amount of base broadening, although only for a narrow group of taxpayers (the familiar households with incomes above $250,000).聽 (The limit of the broadening to that small group results in a revenue gain of $584 billion over ten years鈥搘hich is like broadening the tax base by about 1/20th the total value of tax expenditures.)聽 But my point is there are ways to substantially reduce the cost of the most expensive tax expenditures to both make the proposals more palatable and to raise enough revenue to support a decent amount of rate reduction or at least 鈥渞ate preservation.鈥澛� It still isn鈥檛 easy to do, but that鈥檚 still mostly a political obstacle rather than an economic or administrative one.