A Redistribution Scheme Posing as Deficit Reduction

Commission Co-Chairs Erskine Bowles and Alan Simpson
The Deficit Commission has proposed a plan to rewrite the social contract, and make the poor and middle class pay

The Deficit Commission may have styled itself from day one as a "bipartisan team" bent on cutting the nation's debt, but upon close inspection some its core proposals seem less about reducing absolute debt, and more about shifting tax burdens to rewrite the social contract.  The central feature of the plan —which upon first read appears to be a smorgasbord of spending cuts that would hit every sector of society equally— is redistribution.

By its very definition redistribution never affects all sectors of society equally.  Wealth and income are  shifted among different classes, races, men and women, and sectors of capital under any redistribution scheme.  On balance the Deficit Commission's proposal calls for a restructuring of the US political economy to benefit corporate capital and the wealthy, and to force the poor and middle class to pay for an increasing share of everything.

The options presented with respect to comprehensive tax reform are an excellent case in point.  The Deficit Commission presents us with several alternatives, all of which would produce a general state of austerity, but also shift wealth and income in drastic ways.  For brevity we'll just look at one of the tax plans.

The "Zero Plan" takes its name from the fact that it would begin with a near total elimination of all tax expenditures.  Tax expenditures are deductions that taxpayers (persons and corporations) can make by tallying up special exemptions, credits, and rebates that the Congress uses to promote certain economic and social behaviors like home ownership or industrial investment.  In a nutshell the Zero Plan would reduce the tax code to three individual rates and a single corporate rate.  Within these four rates the plethora of tax expenditures would be drastically cut back, saving $1.1 trillion according to the commission.  The Congress would then use this cash to reduce the deficit and further reduce marginal tax rates across the board.  Last but not least, the Commission says that the Congress would "add back in any desired tax expenditures, and pay for them by increasing one or all of the rates from their zero- expenditure low."

From the Deficit Commission's Co-Chairs' Proposal.
The Commission's draft proposal includes a graph —"Who Benefits from Tax Expenditures?"— to illustrate the main beneficiaries of tax expenditures, implying that the plan is fair to the poor and middle class because under the current tax code, with its complex and vast array of itemized deductions, it is the wealthy who disproportionately benefit from expenditures.  The bottom half of taxpayers benefit mostly from a handful of major deductions which include refundable credits such at the Earned Income Tax Credit, Child Tax Credit, and deductions on mortgage interest.  The wealthy and corporations on the other hand, pay professional accountants to rack up numerous and byzantine deductions on their assets.

However if we read closely into the Zero Plan its redistributionary nature becomes apparent.  First there's the matter of the "simplification" of marginal tax rates to three personal brackets and one corporate bracket.  While this means of cutting taxes relies on eliminating tax expenditures, and therefore will not affect social welfare programs financed through legislation, at the zero baseline level it does eliminate very important tax reductions for the low-income working families.  These tax reductions are relied upon for for survival –to provide income to pay rent, tuition, for child care, and groceries— and therefore are fundamentally different from tax expenditures available to the wealthy and corporations.  Equally eliminating reductions that allow poor people to pay their rent or purchase food and clothing is not at all equal to the elimination of a deduction that allows a millionaire to pocket tens of thousands of dollars because of their second and third homes.  In treating every taxpayer equally, the Co-Chairs' Proposal does disproportional harm to those at the bottom.

While the reduction in marginal tax rates appears to be fair and even across the board, we have to remember that we're cutting rates across a drastically different set of absolute incomes.  This means that while millions of taxpayers in the lowest tax bracket would see a seven point drop, the money they keep will only be a tiny fraction of what a taxpayer in the uppermost brackets will save under the plan. 

For example, a single person with an income of $34,000 is schedule to pay at a rate of 15% in 2011, totaling about $5,130.  Under the Zero Plan their tax bracket would fall to 8%, reducing their tax burden to $2,740.  They save about $2,390, and while this is a serious chunk of change, it's also not a serious bit of assistance considering the levels of debt Americans are now dealing with, as well as the rising costs of everything from education to gas.

However if we look at a taxpayer in the upper brackets the saving are immense.  An individual with an income of 375,000 is scheduled to be taxed at a rate of 33% in 2011.  Under the Zero Plan their burden is reduced by 10 points to 23%.  Their savings under the Zero Plan increases by $37,570 —more than the pre-taxed income of the above mentioned hypothetical individual!  At the uppermost levels, the realm of millionaires and billionaires, tax rates reach 39%, but under the Zero Plan would all drop to 23%, allowing the nation's wealthiest individuals and families to keep an immense share of wealth that would otherwise fund important federal programs that benefit the majority of Americans.

The impression of equality that the across-the-board cut of tax rates gives under the Deficit Commission's proposal is therefore illusory.  Low-income and middle class families will end up saving relatively small amounts of their income that will hardly make a difference in paying for housing, health care, transportation and other major expenses, while at the same time losing key tax credits and deductions they already rely upon.  The wealthy, on the other hand, lose the myriad of deductions they already use to save immense amounts of money from the tax man, but they save these funds anyhow with the huge proportional drop in their tax rates relative to the poor and middle class.

The Zero Plan includes three baseline options that do not initially ax the Child Tax Credit, EITC, and Current Mortgage, Health and Retirement Benefits.  This is where the Commission's redistributionary measures become a little more subtle, and it takes a little unpacking.  Here's how the Zero Plan, even when it keeps these important tax expenditures, harms the poor and middle class by redistributing the tax burden on them.

The first thing to note is how the corporate tax rate drops from 35% to 26%.  Then, under each scenario which considers keeping some or all of these important tax reductions for working and middle class families, the corporate rate does not rise if (under scenario B) the Child Tax Credit and EITC are kept, and then only rises one point at a time under the next two scenarios (C and D) including further tax expenditures.  Table 1. illustrates this virtual corporate exemption from incremental rate increases.  This two point absolute rise contrasts starkly with the 5 to 7 point rises for individual taxpayers, with the middle class taking on the burden of rate increases to pay for retained expenditures.

Table 1. Tax rate increases under the Zero Plan's scenarios, A, B, C, D (data adapted from the Deficit Commission's draft proposal).

1 comment:

Anonymous said...

REdistribution occurred under the TARP bailout, and continues. This is just the final nail in the coffin if enacted.