October 12,2012

Memorandum To Editors & Reporters: JCT Experiment


TO:               Reporters and Editors
FROM:           Antonia Ferrier and Julia Lawless for Senate Finance Committee
                    Ranking Member Orrin Hatch (R-Utah)   
RE:               JCT Tax Reform Analysis
DATE:           Friday, October 12, 2012
The Joint Committee on Taxation (JCT) today released a very preliminary, rough and incomplete analysis of individual tax rate reduction from closing tax expenditures, credits or deductions.  This JCT study is but one analysis of one hypothetical tax reform option.  JCT itself describes the study as an “experiment.”  It is not an analysis of the Bowles-Simpson tax reform plan.  It is not an analysis of Governor Romney’s tax reform plan.  It is not an analysis of President Obama’s tax reform principles.  Furthermore, this study does not include all the base-broadeners available for tax reform.  If more were included, those base-broadeners would provide the means for further rate reductions and other structural reforms of the tax system.

What this JCT study confirms is that, using their menu of base-broadeners:

  1. Using only a small portion of the tax base broadeners available is sufficient to cut the rates  by 4% across-the-board.
  2. That means that, using only some of the tax base broadeners, that modest across-the-board reductions in rates could be achieved and the new system would retain the tax code’s progressivity.
  3. That is, there would be no shifting of the burden from high income taxpayers to taxpayers further down the income scale.
  4. Importantly, most of the limited number of tax base broadeners in the analysis are used to offset: repeal of the Alternative Minimum Tax, the personal exemption phaseout, and the limitation on itemized deductions; and extension of the child tax credit and earned income tax credit that were enlarged in the 2009 stimulus bill.  Therefore, most of the base broadeners utilized in the analysis are not used to reduce tax rates, and if they were, the rate reduction would be much greater.  

The JCT study assumes an across-the board tax increase:

  1. The JCT study uses the current law baseline.
  2. It means all the tax hikes scheduled to arise with the fiscal cliff go into effect.
  3. That’s a tax increase of roughly 10% more than the tax policy that is in effect now.
  4. No leading policy maker has proposed the level of across-the-board tax increase assumed in the JCT study.

There are some who may suggest that this study is evidence that tax reform should not be undertaken.  Their position is that we should close deductions, credits or tax expenditures to broaden the tax base without any rate relief, in order to pay down the debt and without having to shrink the bloated size of government.  To put it bluntly, their position is raise taxes in order to keep spending money we don’t have and without any requisite reforms to the leading drivers of our debt: our entitlement programs.

Furthermore, this position would dramatically raise the tax burden on flow-through businesses which tend to be small business.  That would mean a permanent significant reduction in the after-tax rate of return on investment in general and small business. That ultimately translates into fewer jobs.

It means the lowest possible hike in the top marginal rate on small business income would be 17%.  It means the lowest possible hike in the top rate on investment income would be 59%.

JCT data show that the alternative minimum tax (“AMT”) becomes a larger and larger stealth tax hitting middle-income families.  This “no reform” position means over 19 million mostly middle income families will pay almost $2,500 apiece in AMT next year.  It means over 48 million mostly middle income families will pay almost $3,300 apiece in 2022.  

This “no reform” position means many of the widespread complexities, especially those disproportionately affecting high income “blue states” will come back into play.

While every non-partisan expert under the sun has said entitlements are the source of our fiscal problems, it’s unclear how much those on the other side of the aisle are committed to reforming these programs.  What would they offer up on the driver of our deficits and debt problem?  What kind of entitlement reforms do they envision?

The bottom-line is this:

  1. The JCT study is an experiment.
  2. It does not represent any tax reform proposal on the table.
  3. It assumes an across-the-board tax increase by assuming that policy makers decide to go off the “fiscal cliff”.
  4. The study did not plumb the depth of base-broadeners available for a reform plan.
  5. Those who seek to use the study to kill tax reform efforts should be accountable for the defects of the current system, like the AMT ticking time bomb.

Those who talk loosely about entitlement reform should be held to the same standard of disclosure they are employing against proponents of tax reform.