Actually, Comprehensive Tax Reform Can Be Progressive

Congressman Ryan has come under attack, recently, for the tax reform framework in the House Republican budget proposal. CBPP calls it "huge tax benefits for wealthy Americans" -- a point Paul Krugman echoes by arguing the Republican plan includes "huge tax cuts for corporations and the rich." Like these critics, we don't believe that now is the time to be cutting taxes given our current fiscal situation. But it isn't clear that the plan is any more regressive or progressive than the current tax code -- that depends on the precise details.

The plan in Congressman Ryan's budget calls for the Ways & Means committee to enact comprehensive tax reform, which reduces the top individual and corporate rates to 25 percent in a revenue-neutral manner. True, that means substantial rate cuts for those at the top -- but whether they disproportionately benefits from the plan depends on how the cuts are paid for.

Presumably, the Committee would finance the reduced rate by eliminating and scaling back tax expenditures. These deductions, exclusions, and preferences are for the most part regressive -- benefiting upper income taxpayers far more than those near the bottom.

An analysis from the Tax Policy Center, for example, found that the top quintile pays 11 percent less of their income in taxes due to tax expenditures, while the bottom quintile pays only 6.5 percent less. If you exclude the effects of the child tax credit and EITC, the bottom quintile pays only 1 percent less as a result of tax expenditures, compared to 11 percent at the top.



As can be seen, tax expenditures are not a progressive form of spending (in the tax code, yes, but spending nonetheless). This is true for a number of reasons, including that higher earners participate more in tax preferenced activities (like retirement savings and mortgages) and are more likely to be able to itemize their deductions. In addition, for many tax expenditures, the more you earn the more you get; someone at the 15 percent rate gets a 15 cent subsidy for spending a dollar on the same activity for which a high earner may get a 35 cent subsidy.

Given that, even rate reductions can be done in a way that is progressive after reducing/reforming tax expenditures. For example, the Fiscal Commission's "modified zero plan" would bring the top rate down to 28 percent, but still ask those at the top to contribute a higher share of their income to taxes (compared to a small tax cut for the bottom quintile).




CRFB policy director Marc Goldwein and Paul Weinstein explain this in a recent paper, arguing that rate-lowering, base-broadening reforms can increase economic efficiency and increase progressivity at the same time, in addition to reducing the deficit.

Whether the House Republican plan will do this of course depends on the details. There is currently not enough specificity to say one way or the other.

It is true that the House Republican tax reform plan does nothing to reduce the deficit, and could be greatly improved by dedicating a portion of the savings from reducing tax expenditures to improving the country's fiscal situation. But on the question of progressivity, critics should take a wait-and-see approach.