Hitherto, the standard position on both sides of the aisle with respect to taxes as a part of deficit reduction has leaned strongly toward tax “reform.” The word “reform” can mean anything that anyone wants it to mean, of course. But if the word has borne any content at all with respect to taxation, it has meant “broaden the base, and lower the rates” — in other words, close or narrow selective tax preferences, and use the resulting additional revenue to reduce tax rates for everyone.
Tax reform for deficit reduction, however, could reduce tax rates to give back only some, not all, of the revenue gained by cutting back tax preferences. The rest of the revenue gained would be kept by the federal government to reduce the deficit. (Some would assert that the rate reductions could return all of the revenue gain using static scoring, but that taxpayers would work harder and invest more, which would result in more revenue being collected at the end of the day — the classic argument for dynamic scoring. Large deficits in the 1980s and in the decade of the 2000s make that proposition suspect.)
But earlier this week, Senator Charles Schumer (D-NY), who has become involved in the “Gang of Six (or Eight, depending on who is counting)” budget discussions in the Congress, made a contrary speech. Senator Schumer says that Congress should give up on reducing tax rates, and instead use any tax-preference cutbacks purely to raise more revenue. He concludes that this path will be more likely to reduce the deficit, and will be better for the middle class.
Two weeks ago, I wrote about a claim that increases in tax rates on capital gains reduce revenue (and vice versa). This week, I would like to put that question in the context of the potential for a budget agreement in Washington – which three weeks ago I wrote is not going to happen in 2012, either before or after the election.
So where will capital gains taxation – and tax reform generally – stand in any budget deliberations?
If either party sweeps the board in November, then that party may succeed in resolving the budget issue all by itself, and all in its own way, early in 2013. The House of Representatives can do anything that a bare but unified majority wants to do – essentially overnight. (The “overnight” part is why the staff burn out so quickly, whether their marriages survive or not.) And just about the only thing that a bare majority can do in the Senate is to pass a budget resolution that includes “reconciliation instructions,” which empower that same bare majority to pass a strictly budget-related “reconciliation bill” that is not subject to a filibuster (that is, endless debate – which can be terminated only with 60 votes). If a President of the same party is waiting to sign that reconciliation bill, then, bingo – enormous change can be achieved in a very short time.
It isn’t necessarily quite that simple.
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A Washington Post column this morning repeats what has become a standard entry on three-by-five cards routinely distributed around this town: “…50 years of economic history show that raising the capital gains tax backfires: It reduces federal revenue, while lowering the tax raises revenue.”
There are several problems with this assertion, perhaps most notably that in the last 50 years, we have increased tax rates on capital gains only twice – in 1969 and 1986. Continue Reading >>