In his 1997 tax deal with Congress, Bill Clinton helped add multiple new items to our tax forms, such as tax credits for children, deductions and credits for college expenses, a new flavor of IRAs, medical savings accounts, and more--along with a variety of eligibility rules and phase-outs. The IRS managed to squeeze all of these onto the 1040 form, but it'll be hard to make space for any more lines without resorting to obituary-size type and a magnifying glass.
Yet in this year's State of the Union, the president has proposed an even longer list of additions to the tax form. There's a new kind of college tax credit/deduction as well as tax subsidies for long-term care expenses, health insur-ance credits, still another type of retirement savings vehicle, a new adjustment for certain charitable donations for nonitemizers, different standard deductions for two-earner couples versus one-earner couples, and so on.
Yes, I understand the president feels he can't get his policy initiatives considered by the current Congress unless he styles them as tax cuts rather than direct spending. And, yes, many of his proposals arguably attempt to address real social needs. But doesn't anyone worry about tax complexity anymore? Sometimes it seems like Bill Clinton wants his legacy to be the ever-expanding tax form.
Love and Marriage
For Valentine's Day, House Republicans (with the help of 48 Democrats) passed a reduction in the "marriage pen-alty," the extra income taxes that a married couple pays compared to a similar-income couple living in sin. Effective in 2001, the GOP plan would boost slightly the Earned Income Tax Credit for couples and raise the married standard deduction to twice the single person's amount. In addition, the plan would increase the starting point for the 28 percent tax bracket for couples to double the nonmarried level. The White House has vowed to veto the measure unless it is drastically scaled back.
Although this last change (a) doesn't start phasing in until 2003, (b) doesn't become fully effective until 2008, and (c) only affects the one in three couples now in tax brackets higher than 15 percent, it still represents the lion's share of the $182-billion, 10-year cost of the proposal. Indeed, when the GOP's entire marriage penalty plan is fully in place, two-thirds of its annual tax cuts will go to couples making more than $75,000 a year.
I'm all for marriage penalty relief, but it doesn't have to require shifting taxes away from the better-off or using up revenues that might better serve other priorities. As my brother Michael and I explain in the summer 1999 Valparaiso University Law Review, it's technically easy to get rid of the marriage penalty without adverse distributional consequences or revenue loss. The trick is to cut taxes slightly on married couples and raise them slightly on singles. The McIntyre & McIntyre marriage penalty elimination plan entails the typical married couple getting a tax cut of $117 a year and the typical single person paying $67 more--tax shifts so minimal that hardly anyone would notice, but that would allow married couples to sleep easier at night.
The House Republican marriage penalty relief plan has some admirable features: Notably, it doesn't treat couples differently based on the share of a family's income each spouse happens to earn. But to get bipartisan support for action, Republicans need to take the next logical step and stop conflating marriage penalty relief with tax cuts for the well-off.
In January, the Congressional Budget Office (CBO) released its latest guesstimate on federal budget surpluses in the upcoming decade. This time, the CBO forecasters have pretty much dropped the charade that the huge cuts in future appropriations envisioned in 1997's so-called Balanced Budget Act will ever occur. Nevertheless, revised economic projections allow the CBO to predict that non-Social Security surpluses will total some $838 billion over the next decade, with the Social Security surplus running to $2.3 trillion over the same period.
But these rosy projections rest on some shaky assumptions, the shakiest being that appropriations will remain flat (adjusted for inflation) over the next decade. Even if appropriations grow in proportion to the population as well as to inflation, the CBO's $838-billion projected non-Social Security surplus falls by more than half, to $399 billion. And if the growth in appropriations keeps pace with the growth in the economy, the non-Social Security surplus drops to zero.
George W.'s Plan to Eliminate the Surplus
The CBO also projects that total tax revenues will decline somewhat as a share of the economy from fiscal 2000 to fiscal 2010. Meanwhile, spending on everything except interest is expected to remain constant as a share of the gross domestic product (GDP) over the entire decade. (Big projected increases in health outlays as a share of the economy offset declining GDP shares for other programs.)
With revenues falling and program spending flat, how do projected surpluses rise so dramatically over the decade? The answer is that the CBO foresees interest on the national debt falling from 2.3 percent of the economy this year to only 0.5 percent by 2010. But here's the rub: That decline in interest depends on a reduction in the national debt, which in turn depends on running surpluses in the first place.
A virtuous cycle, you might say. But politicians who propose to devote a big chunk of the surpluses to, say, tax cuts, are using up a lot more of the surpluses than they realize. Indeed, George W. Bush's extravagant tax-cutting plan would not only far more than wipe out any non-Social Security surpluses over the next decade; it would also use up as much as 60 percent of the Social Security surplus.
This CPI Needs Adjustment
Recently, the Center for Public Integrity (CPI) issued a weird attack on the Tax Reform Act of 1986, calling it "the greatest giveaway to special interests in the history of the Internal Revenue Code." The broadside singles out Bill Bradley for abuse because of his central role in the 1986 reforms, but it would seem to apply to Al Gore as well, since he voted for the bill.
The Tax Reform Act of 1986 closed about $500 billion in tax loopholes over five years, put no-tax corporations back on the tax rolls, and largely shut down the taxshelter industry. It used the money from the reforms to expand the Earned Income Tax Credit for low-income working families and to cut taxes for all but the top 10 percent of taxpayers.
Allied in support of the 1986 reforms were a vast array of public-interest groups, labor unions, and citizens' groups around the country. The act was also highly praised by most economists because it leveled the playing field for businesses and investments, and made our economy more efficient and productive.
Unsuccessfully opposing the Tax Reform Act were low- and no-tax corporations, tax-shelter promoters, and tax-averse supply-siders. Prominent opponents included, for example, Republican pols Newt Gingrich and Bill Archer, and billionaire Donald Trump, who continues to criticize the act for cracking down on abusive real estate tax shelters.
So what's the CPI's complaint? Accompanying the $500 billion in loophole-closing measures in 1986 was a concession to the political clout of the victims of reform: $11 billion in "transition rules," which permitted some of the reforms to be phased in over time. Some of these phase-ins were justifiable; others were, it is true, sops to special interests. And it is these concessions the CPI finds objectionable. But by definition, all of the transition rules would have been meaningless without the underlying reforms. Would the CPI have preferred that the special interests be allowed to keep their loopholes rather than having the "giveaway" of losing them gradually?