Tax scorekeeper: Ending deductions pays for 4-percent rate cut

Policymakers looking to reform the tax code could only pay for a small reduction in tax rates even after eliminating a slew of breaks and deductions, according to a new report from a nonpartisan congressional scorekeeper.

The Joint Committee on Taxation (JCT) said that scrapping all itemized deductions and taxing capital gains as ordinary income, among other policy changes, would only cover the cost of a 4 percent across-the-board reduction in rates. 

Thomas Barthold, JCT’s chief of staff, stressed in a letter to congressional tax writers this week that his estimate was an “experiment” and listed a number of tax breaks that were not assumed to be on the table for elimination.

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“There are a significant number of other identified individual income tax expenditures or other possible base broadening policies that I did not include in this experiment,” Barthold wrote Thursday to Senate Finance Committee Chairman Max Baucus (D-Mont.) and the panel’s ranking member, Sen. Orrin Hatch (R-Utah).

But at the same time, the tax committee’s findings are the latest in a string of analyses that cast a skeptical eye toward GOP plans to slash tax rates without adding to the deficit. Democrats and some think tanks have said it’s not possible to cut rates to the level that Republicans are advocating without shifting the tax burden toward the middle-class.

Mitt Romney, the Republican nominee for president, has proposed cutting rates for all taxpayers by 20 percent without adding to the deficit. The former Massachusetts governor has said he would pay for the rate reductions by eliminating tax preferences, generally for the wealthiest taxpayers.

On Friday, Republicans spelled out several reasons why they found the JCT analysis lacking, with a spokeswoman for Romney calling it “irrelevant.”

“This self-described ‘experiment’ says nothing about the pro-growth tax reform proposed by Mitt Romney,” said the spokeswoman, Amanda Henneberg.

Republicans on Capitol Hill noted that the analysis assumed that all of the Bush-era tax rates would expire on schedule at the end of the year. Democrats and Republicans agree, by and large, that current rates should be extended at least for family income up to $250,000 a year.

Representatives for Hatch and Rep. Dave Camp (R-Mich.), the House’s top GOP tax-writer, also suggested that, if anything, JCT’s findings made them more confident about tax reform. 

Ways and Means also said that taxing capital gains as ordinary income — which, under the JCT scenario, would mean at a rate approaching 40 percent — would likely be a revenue-loser.

Hatch’s office said JCT’s analysis was “very rough, preliminary and incomplete.” 

In addition to repealing all itemized deductions, the JCT analysis scraps the Alternative Minimum Tax and the current exemption for interest on municipal bonds. 

Popular tax breaks like the deductions for mortgage interest and charitable donations, which could be very difficult politically to get rid of altogether, would be eliminated under the JCT analysis. 

After eliminating those provisions, the scorekeeper found the top income tax rate could be reduced to 38 percent — just under the top rate of 39.6 percent that would take effect at the end of the year if Congress doesn’t act.

Some of the JCT’s assumptions do dovetail with GOP proposals, as Romney has also called for getting rid of the AMT. Some conservatives have said that exempting municipal bond interest from taxation merely encourages more government spending.

But in its experiment, JCT declined to eliminate big-ticket tax breaks like the exclusion for health benefits and preferences for retirement savings. The committee also preserved stimulus expansions of incentives like the earned income tax credit and the child credit, which Republicans want to see expire in January.

Rep. Sandy Levin (Mich.), the top Democrat on House Ways and Means, said the study was just the latest proof that GOP plans would be little more than a windfall for the highest earners. 

Levin has long pointed out that many of the more popular tax breaks, like the mortgage interest deduction, benefit the middle-class.

“Republicans have engaged in all kinds of twists and turns to escape the basic fact that their tax plan would give wealthy taxpayers an enormous tax break and harm middle-income families,” Levin said in a Friday statement. “They can’t twist their way out of the truth.”

The JCT study also comes just days after Sen. Chuck Schumer (D-N.Y.) said that an overhaul of the tax code shouldn’t lower rates for the highest earners, and instead should scrap tax breaks to reduce deficits. 

But the four chairs of recent deficit-reduction panels — former Sens. Alan Simpson and Pete Domenici, as well as Erskine Bowles and Alice Rivlin — said in a Friday statement that JCT forced itself to find trillions of dollars more in deficit-reduction by allowing the Bush-era rates to expire. 

“Nothing in the JCT analysis changes our belief that it is possible for tax reform to reduce rates and produce additional revenues if policymakers are willing to make the tough choices to eliminate or scale back tax expenditures,” the four said.