Orszag's Taxmaggedon Solution
Citigroup vice chairman Peter Orszag, a former director of President Obama's Office of Management and Budget, has an article in the Summer issue of Democracy laying out a scenario for how the 2013 "fiscal cliff" or "taxmaggedon" will resolve:
One path through this brick wall for the Administration would be to allow all the tax cuts to expire and thereby escape the intractable debate over those extensions. In the cacophony that follows, the Administration could then come back in early 2013 with a tax-reform proposal that reduces taxes (compared to the level with the expired tax cuts) disproportionately for middle- and low-income families. If the tax cuts are designed to be universal, even if they are much more progressive than the Bush tax cuts, it would presumably be harder for Republicans to vote against them. One example of this strategy would be to combine a much larger payroll-tax holiday with an increase in the standard deduction. This would provide a substantial tax cut for everyone who works, but the effect would be progressive since payroll taxes represent a larger share of income for low- and middle-income workers than for high-income workers. As with the structure in place for the current payroll tax cut, general revenue would backfill the Social Security and Medicare Part A trust funds, so that the programs would not be harmed by the tax cut.
The problem with simply cutting payroll taxes is that it leaves out nonworkers, like the elderly. Therefore the second component of this proposal would raise the standard deduction, which is claimed by almost two-thirds of elderly filers. This component would also be progressive, since almost all high-income taxpayers itemize their deductions and therefore would not benefit from an increase in the standard deduction, and it would simplify the tax code by removing the need to itemize for more taxpayers.
By changing the discussion to a new tax proposal, it may be a bit easier to perpetuate a higher level of taxation on high-income families rather than continuing to debate the issue within the four corners of the Bush tax cuts. The tax cuts would be designed to avoid or minimize the fiscal contraction at the beginning of 2013, since the economy will remain too weak to handle a substantial fiscal tightening at that point. Ideally, however, even the middle- and lower-income tax cut within this strategy (the payroll tax holiday) would not be a permanent one, since over the medium term the federal government's revenue base is inadequate for the tasks that have been assigned to it. So the significantly larger payroll-tax holiday could phase out as the labor market recovers....
That core tax package could be combined with other features. For example, we should reform the itemized deductions themselves. Many deductions are intended to promote socially beneficial activities, such as saving for retirement, purchasing health care, or owning a home. Yet with a deduction or exclusion approach, the tax benefit from spending $1 on one of these activities depends on the person's marginal tax bracket. A person in the 15 percent marginal tax bracket who spends $1 on mortgage interest, for example, enjoys a 15-cent tax reduction from doing so; a person in the 35 percent marginal bracket enjoys a 35-cent tax cut for that same $1 in mortgage interest paid. This structure makes little sense from either a fairness or an efficiency perspective (as Lily Batchelder, Fred Goldberg, and I have argued in a Stanford Law Review article). A better approach would be to give each of these taxpayers, say, a 20-cent tax credit for each $1 in mortgage interest paid. Adopting this type of progressive approach to itemized deductions may require adding some less desirable policy—such as a second round of a corporate tax holiday on repatriated profits—to make the overall package legislatively feasible.
This is all intriguing, but it seems to assume both an Obama victory in the presidential election and an openness by congressional Republicans (or at least enough of them to join with Democrats to win passage or to end a filibuster) to tax increases that would place more of the tax burden on upper-income tax payers. Customers of Citi's private bank should be aware that the vice chairman of their bank is going around trying to raise their taxes!
by Editor | Jun 12, 2012 at 1:25 pm
Related Topics: Banking, President Obama, Taxes
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