Sorry, Charlie: Tax Reform Doesn’t Have to Mean Raising Tax Rates |

Sen. Chuck Schumer (D-NY) and other proponents of raising taxes on small businesses are either intentionally misleading the American people -- or they’re calling for a $5 trillion increase.

Sen. Schumer and his allies are trumpeting the results of an “experiment” released Friday by the Joint Committee on Taxation (JCT), contending the JCT casts doubt on the viability of a tax reform model that focuses on supporting economic growth by closing special-interest loopholes and lowering tax rates.  In reality, the JCT experiment does the opposite of what Sen. Schumer contends.

What Sen. Schumer and other tax reform opponents aren’t advertizing is that the conclusions reached in the JCT experiment assume enactment of a hypothetical $5 trillion tax increase, which is more than twice as large as the tax increase proposed in President Obama’s budget.  The findings in the JCT study are only operative if a $5 trillion tax increase is enacted – something that is wildly unrealistic, given that no one has proposed such an increase and President Obama’s budget, with its $2 trillion tax increase, failed to receive a single “yes” vote in either the House or Senate.  Either Senator Schumer is intentionally misleading the public by declining to note that the JCT experiment uses this fictitious and absurdly unrealistic baseline, or he has just become the first politician in our nation’s history to call for a $5 trillion tax increase

Sen. Schumer and other advocates of raising taxes on American small businesses are putting the misleading spin on the JCT study as part of their “Thelma and Louise” economic strategy, in which they’d drive the country off the fiscal cliff unless they get the tax increase they’re demanding – a tax increase the independent accounting firm Ernst & Young says will have a major impact on small businesses and cost the U.S. economy more than 700,000 jobs.  Republicans, by contrast, advocate a pro-growth approach.

What’s most notable about the JCT experiment is that it shows that even if a tax increase of $5 trillion were enacted, tax rates could still be reduced across the board via tax reform that focuses on closing special-interest loopholes.  Here are some key facts about the JCT experiment, courtesy of House Ways & Means Committee majority staff:

Absurd Assumptions, Proves Reformers Right

Because JCT was simply conducting an “experiment” as opposed to testing sound policy, they were free to make a limited set of assumptions (such as the need for any tax plan to raise $5 trillion in new taxes) that is totally divorced from reality.  Ironically, in doing so, JCT actually proves tax reform can lower rates.  Consider the following: 

  • The JCT document confirms that despite raising taxes by $5 trillion, tax rates could still be reduced across the board.  Imagine how much further rates could be reduced without having to raise taxes by $5 trillion. 
  • Because JCT was only running an experiment, it only considered certain expenditures as a way to offset lost revenue.  If JCT had considered all tax expenditures, rates could have been reduced much more.
  • Following the “current law baseline,” the JCT model takes capital gains tax rates to almost 40%.  However, there is a consensus among economists that an excessive rate on capital gains – such as 40 percent – would likely lose revenue, making it harder to achieve the goal.  That is why virtually no one proposes taking capital gains taxes that high.
  • Furthermore, as a February 2011 paper from Ernst & Young (E&Y) notes, there are more ways to achieve “base broadening” than simply “repealing or reducing tax expenditures.”  Looking back to the last successful comprehensive tax reform effort (the Tax Reform Act of 1986), E&Y notes that, “more than 40% of the 1986 Act’s $528 billion in tax increases were derived from non-tax expenditures.”  E&Y also noted that “[t]he president’s 2012 budget, for example, shows that additional base broadening is possible, since 59% of its proposed tax increases are not tax expenditures.”

History and a Bipartisan Coalition Show Rates Can Be Reduced Significantly

The JCT model shows that even when working under a limited set of assumptions, and being forced to raise $5 trillion in new taxes, rates can be reduce by four percentage points.  There is strong historical and bipartisan precedent to go much further on rate reduction.

  • 22 Points: The Tax Reform Act of 1986, which was agreed to by President Ronald Reagan, a Democrat House and Republican Senate, reduced the top marginal rate from 50% to 28% – without raising revenues.
  • Up to 16 Points: The President’s fiscal commission, led by former Clinton White House Chief of Staff Erskine Bowles and former Republican Senator Alan Simpson, presented options that eliminated loopholes in order to reduce the top tax rate to a low of 23 percent and a high-end of 28 percent.