A new report by Democrats on the Joint Economic Committee concludes that the GOP plan to enact large income tax cuts that disproportionately benefit top earners will be difficult to pay for by closing myriad tax loopholes — and that the loopholes that would likely have to be closed disproportionately benefit the middle class. The net result, according to Democrats, is that the Republican party’s tax plan would increase the tax burden for middle-income earners while lowering it for the wealthiest Americans. But the report makes several key assumptions many of which, Republicans claim, distort the GOP’s policy agenda.
The House GOP budget, authored by Rep. Paul Ryan (R-WI), would make major changes to the tax code. It would reduce the top tax rate to 25 percent and fold all the lower brackets into a single, second bracket at 10 percent. It would index the Alternative Minimum Tax to inflation and eliminate new taxes in the health care law. Together, according to Democrats and the Tax Policy Center, these changes would increase deficits by $4.5 trillion over 10 years.
Republicans claim they’ll cover that cost by eliminating unspecified loopholes in the tax code. But what the Democrats’ report shows is that if Republicans want to lock in other key GOP policy goals, like maintaining low capital gains tax rates, or eliminating capital gains taxes altogether, they’ll likely have to close loopholes that disproportionately benefit the middle class.
Erskine Bowles, a co-chair of President Obama’s fiscal commission seems to agree. Speaking of Mitt Romney’s similar plan, Bowles told Bloomberg, “It’s just not enough money there in getting rid of the tax expenditures that only affect the upper-income people. You’re going to have to affect people down through the brackets.”
The net result, according to Democrats, is that middle-income tax payers will actually end up paying more in taxes than they do now, under the GOP plan.
Republicans note, though, that Democrats are distorting the GOP policy agenda. Specifically, Republicans call for extending the Bush tax cuts, and then passing a new round of tax cuts on top of them. They propose to pay only for the new tax cuts, by closing loopholes. That would leave them room, in theory, to close loopholes in a way that protects middle-income earners.
The Dem report, by contrast, assumes they’ll pay for all of the tax cuts, including the Bush tax cuts, by closing loopholes — which would require eliminating all of the expenditures in the tax code.
“Republicans will need to gut almost all the current credits and deductions in the tax code, including ones that benefit the middle class,” Sen. Chuck Schumer (D-NY) told reporters on a conference call Wednesday.
But that’s not what the Republicans propose to do.
“[T]his isn’t the House GOP budget’s tax plan,” says Ryan Ellis, tax policy director at Grover Norquist’s Americans for Tax Reform.
Still, Republicans also recognize the risk that their plan will prove more regressive than advertized, and that they may have to make changes. In what Schumer described as a major breakthrough, a Ryan spokesman told the Washington Post, they “are open to changes to [capital gains and dividend tax] rates.”
And as Roberton Williams, a senior fellow at the Tax Policy Center explained, the goals of revenue neutrality and fairness to the middle class aren’t compatible. Quoting the Post:
“Even with eliminating fairly major tax preferences, the Ryan tax plan remains regressive. That’s the bottom line,” he said. “Unless you go after the tax preferences that benefit the wealthy” — capital gains, dividends, tax-free interest on municipal bonds — “it’s really hard to undo the regressivity of the rate changes. You’ll be shifting the burden of the tax code toward the middle class.”
