Auditing the Tax Plan

I'm not sure Brad Plumer's comments on CAP's tax reform plan are fair. While he's right that raising revenues to 17.2% of GDP isn't enough to close the deficit, this plan isn't really a tax proposal ready for implementation, it's a tax proposal ready for prime time. The aim of it, quite overtly I think, is to offer Democrats something that is responsible (though not perfect), that is attractive, that gives most Americans tax cuts, that broadens the tax base, that solves Social Security, that's pretty progressive, and that lays out a vision of what tax reform should look like. This way, Democrats can spend their time on the Sunday shows debating whose proposal offers larger tax cuts, more help to the middle class, and more incentives for the poor (as in the restoration of the EITC for single-parents who get married), rather than whether tax reform is a good idea or not. We need to be responsible in what we put forth, but considering our ability to pass the plan is roughly commensurate with Nancy Pelosi's ability to leap tall buildings in a single bound, I don't think our proposal has to make the tough choices and tradeoffs that it would if we were in the majority.

Conversely, I think the criticism focusing on the enormous jumps between tax brackets are right on. My feeling is that that's good for selling the plan (three brackets sound pretty simple to people), but deeply counterproductive if the fight turned real. If the CAP plan ever got a serious hearing and found itself being debated as a possible piece of legislation, the brackets would have to be reworked so a pay raise doesn't become an immediate and deep pay cut -- that sort of thing really would retard work. But this proposal won't be seriously scrutinized, it'll be a vague Democratic plan that we can use to counterpoint Republicans and allude to as a "better way". I'd remind my wonky lefty friends that we're out of power and, if we insist on opposing as if we were legislating, we're quite unlikely to regain it. The problem with being in the majority is that you have to make hard choices. When you're in the minority, it's ice cream and fairy tales all the way to the ballot box.

Update: Matt says the same thing, but better.

Update 2: In comments, Kenneth Fair proves me completely wrong:

Ezra, Ezra. You've made the same mistake regarding tax brackets that most Americans do. Getting a raise that moves you to a higher tax bracket can't give you a pay cut. The higher bracket isn't applied retroactively to all your income, just to the portion that's in the bracket.

A quick example: Let's say there are two tax brackets, 25% and 50%, and you have an income that puts you at the very top of the 25% bracket. All of your income is taxed at 25%. Then you get a raise that lifts your taxable income by $10,000. The $10,000 is taxed in the 50% bracket, but all the rest of your income is still taxed at 25%. The net effect of your raise is to give you $5,000 in your pocket.

Unless the bracket you move into is over 100%, it can't possibly turn a pay raise into a pay cut.

So there you have it. On the bright side, I've got a book on tax policy coming this week, so I hopefully won't embarrass myself too many more times. And yes, I said a book on tax policy. 360 pages on the subject. See what I go through for you guys?

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