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Thursday, November 15, 2012

Kleinbard: The Better Base Case

Huffington Post op-ed:  The Better Base Case, by Edward Kleinbard (USC):

Trying to rewrite all of our tax and spending policies in one grand bargain in the next few months is just too big a pig for the legislative snake to swallow. The trick is to break the problem into more digestible components, while still linking each step to the other. That's what the Better Base Case legislative package sets out to do. [The Better Base Case, 135 Tax Notes 1237 (June 4, 2012).]

Here are its components:

  1. Repeal the automatic spending cuts scheduled to begin January 1st, and raise the debt ceiling.
  2. Adopt a tax system projected to yield revenues over the next 10 years equal to the CBO's "baseline" projections, but with a three-year phase-in and with the structural tweaks described below.
  3. Adopt a new Budget process, under which Congress binds itself going forward to keep a "scorecard" of future spending cuts, compared with CBO baseline spending; under this law, future net spending cuts would automatically be applied to reduce tax rates, in the manner explained below.

The result? A budget that in all cases would keep deficits at very low levels, and that would allow Congress over time to agree to spending cuts, impelled in that task by the knowledge that every net spending cut delivered would automatically translate into lower taxes for constituents. ...

The Better Base Case addresses those flaws by proposing the following amendments to the baseline tax law:
  1. Permanently repeal the individual AMT.
  2. Retain the child tax credit at its 2012 level.
  3. Keep the tax rate on dividends the same as the tax rate on capital gains (20%), rather than reverting to a system where dividends are taxed at full ordinary income rates.
  4. Reinstate 2009's estate tax rules (a $3.5 million exclusion (permanently indexed for inflation from 2009) and 45% tax rate). This is much more generous than the estate tax laws assumed in the CBO's baseline revenue projections. ...

The Better Base Case puts in place a level of tax revenues, and a path to buying down those higher taxes, that should have sufficient logic and power to survive efforts to tear it apart.

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Comments

Non-expert readers might not realize that "CBO baseline spending" means spending as much as necessary to maintain promised benefits. In other words, it's a money-is-no-object spending level. That's hardly an appropriate starting point for negotiations, let alone a final compromise. Huge tax increases would be necessary to fund this impossibly high baseline.

For politicians, the advantage of maximal spending as a baseline is that any policy changes can be labeled spending cuts. That game doesn't fool anyone any more.

Posted by: AMTbuff | Nov 16, 2012 4:18:34 PM