Sunday, July 29, 2012

Bowles-Simpson: What am I missing?

The Bowles-Simpson deficit reduction plan is causing consternation among people with whom I usually agree.  But it has a couple of important features that I like--it cuts tax expenditures that tend to be both distortionary and regressive (such as the mortgage interest deduction) and it taxes investment income at the same rate as ordinary income.  This second feature essentially ensures implementation of the Buffet rule.

As it happens, the Tax Policy Center at the Urban Institute and the Brookings Institution evaluated the distributional impact of Bowles-Simpson relative to current policy.   Here is what they found:

Look at the column entitled "Percent Change in After-Tax Income."  Everyone takes a hit, but the hit in the lowest quintile is near zero--for the top one percent, the hit is almost three times higher than average; for the top 0.1 percent, it is four times higher than average.   This looks awfully progressive to me...

12 comments:

Matthew said...

The spending side?

econsoldier.com said...

I believe for every dollar of revenue increases there is 3 to 4 dollars of spending cuts which would all fall on the middle class, elderly, & social safety net in general. I actually go to USC and am at Marshall and I think of how the GOP congress screwed us over on the FAFSA with how the student loans are changing yet we live in a society were we are no longer able to tax our upper class 4% more (The 90's tax rate on the top income bracket was 39% instead of 35% and I don't remember the economy being all the bad back then when growing up either).

It will cause serious pain if the fiscal cliff is not averted for another year or so but the Bush tax cuts for ALL tax rates need to go up if you want to get serious about balancing the budget. That and health care reform, the rest of it is marginal and small potatoes as they say.....Fight on!

Nathan Tankus said...

In addition to the spending side being extraordinarily regressive (and i think the tax side is worse then you imply) there are those of us who disagree with the deficit cutting mania entirely and think that in some cases a highly austere progressive tax system will hurt the poor and working class much harder then an expansionary regressive tax system.

Nathan Tankus said...

It doesn't materially help someone who's payroll taxes and income taxes got substantially raised to know that some very rich guy had a tax rate increase somewhat.

rjs said...

there is a reason it was called the "catfood commission"

its not about tax changes...
it has to do with cuts to the elderly on fixed income...

ProGrowthLiberal said...

Here's an important part of the puzzle. Do the reductions in tax expenditures offset the reductions in marginal tax rates or not? While that table from the Tax Policy Center indicates the well to do on net will be paying more in taxes under Bowles-Simpson, Michael Hiltzik cites out publications from the Tax Policy Center that suggest that the revenue losses from tax rate reductions will dominate the eliminations of tax expenditures.

Matthew Martin said...

I think a big part of what your missing here is the basic question--if Bowels-Simpson is about deficit reduction, why are they cutting anyone's tax rates?

The tax policy changes in Bowels-Simpson are about as close as you can get to a revenue neutral proposal--your chart looks like there is a net increase in revenues, but as other commenters note, other estimates show a net loss, so its a toss up.

So the big problem progressives have with it is the presumption that the government doesn't need revenues to operate on a balanced budget...

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cccarter2010 said...

what do you think about the ed demarco thing?

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