TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Saturday, October 13, 2012

Joint Tax Committee: Repealing Deductions Pays for 4% Tax Rate Cut (Not 20% Claimed by Romney)

Joint Tax CommitteeThe Joint Committee on Taxation yesterday released a report throwing water on the possibility of reducing tax rates by eliminating tax expenditures. The report assumes that Congress allows today's reduced rates to rise in January and concludes that the elimination of certain provisions (the AMT; limitations on itemized deductions and personal exemptions for certain taxpayers; itemized deductions; preferential rates for capital gains and dividends; interest exclusion on state and local bonds) would fund only a 4% decrease in all ordinary income tax rates (from 15% to 14.4%; 28% to 26.9%; 31% to 29.8%; 36% to 34.6%; and 39.6% to 38.0%). The report did not consider the exclusion for employer-provided health care; earned income tax credit; child tax credit; and retirement and pension provisions.

Alan Simpson, Erskine Bowles, Alice Rivlin and Pete Domenici released this statement in response:

A new study by the Joint Committee on Taxation (JCT) assumes a less drastic reduction in tax expenditures and a different baseline that allocates more savings to deficit reduction, and therefore is able to achieve much less rate reduction. The fact that rates cannot be lowered as much if large tax expenditures are left unaddressed and if most of the savings from those that are eliminated are put towards deficit reduction illustrates a tradeoff, but does not surprise anyone who has worked with tax estimation.

The JCT study looks at only a subset of the tax expenditures we reformed or eliminated, thereby leaving out a substantial amount of savings that were included in our proposals. Most notably, the JCT study does not address the employer health exclusion, the largest tax expenditure in the code, as our plans would. In addition, the JCT study assumes tax reform is revenue neutral relative to a "current law" baseline -- a baseline that includes the expiration of all parts of the 2001, 2003 and 2010 tax cuts, a position neither party is advocating. This assumption effectively required the JCT to find $4.5 trillion of deficit reduction through base broadening -- far more than is included in our plans or any other plan - and use only roughly $700 billion for rate reduction.

JCT looked at one possible model for tax reform -- although we do not disagree with their analysis, it does not reflect the model embodied by our plans. Nothing in the JCT analysis changes our belief that it is possible for tax reform to reduce rates and produce additional revenues if policymakers are willing to make the tough choices to eliminate or scale back tax expenditures. There is no question that reforming the tax code will require making hard and careful choices. Policymakers should work diligently on a bipartisan basis to identify the appropriate reforms to force our debt under control and get our economy growing.

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The JCT does not eliminate the two biggest drains on federal revenue: the health care exclusion and the mortgage interest deduction. Elimination of these two tax expenditures would permit greater rate reduction, and I would like to see an alternative computation by the JCT that included the elimination or partial elimination of these two items. Comparison of the two computations would give voters a clearer picture of what Mr. Romney may be proposing. (I say "may be" because neither he nor his running mate will say whether these items are "on the table." Actually, their silence answers the question.) At any rate, the reality of the politics of these tax expenditures is quite simple. Any senator or representative who voted to eliminate substantial portions of the health care exemption or mortgage interest deduction better start raising money for their next campaign. Because D, R, or TP, they would face a very stiff, if not insurmountable re-election effort.

Posted by: Publius Novus | Oct 15, 2012 6:42:28 AM