Don’t Worry About the Revenue in Sen. Mike Lee’s Tax Plan

Utah Senator Mike Lee unveiled a very promising tax plan yesterday. Like all Republican plans, it cuts rates, broadens the base and simplifies the tax code. But it also has a number of other very progressive elements and Lee says it is expected to take in revenues of approximately 18-20% of GDP. Overall, it’s a very intriguing plan and has rightfully been praised around the internet today.

But a couple of people have pushed back on the revenue amount. Business Insider’s Josh Barro, who titled his piece “Here’s a Republican Tax Plan that Doesn’t Suck,” calculated the amount he would pay under Lee’s tax plan and to his surprise, found himself receiving a tax break:

The question is, who pays more to offset those tax cuts? Lee hopes his plan would collect 18 to 20% of GDP in revenues, meaning it’s not a big tax cut overall. And as with a lot of Republican tax plans, he may have trouble hitting that target.

At first glance, it looks like his plan would raise taxes on affluent people without children. But I’m such a person, and when I ran Lee’s plan against my 2012 taxes I found I would have gotten a $1,400 tax cut. His plan raises my top marginal tax rate from 28% to 35% but more than offsets that because most of my income only gets taxed at 15%

Slate’s Matt Yglesias calculated his own tax liability under Lee’s plan too and found a similar result, leading him to describe it as “like smoke and mirrors.” The Atlantic’s Derek Thompson isn’t sure how Lee gets to a revenue-neutral tax plan as well and recommends that the freshman senator tax capital gains as ordinary income.

Here’s the thing: it doesn’t matter how much revenue this tax plan raises. What matters is the structure of it and that Lee is aiming for revenues between 18-20% of GDP. Once the Joint Committee on Taxation, the Tax Policy Center, Brookings and any other organization score the plan, we’ll have a better idea about how much revenue the plan actually raises and the distributional impact of it.

But we now know that Lee is interested in reforming the tax code in a way that helps the middle class. His plan also isn’t hugely regressive like all of the flat tax plans other Republicans have promoted. If the score comes back with revenues below Lee’s estimate, then he has to tinker with the rates or possibly add a third bracket. He could follow Thompson’s advice and tax investment as ordinary income. If he wanted to really be aggressive, he could lobby for a carbon tax.

There are plenty of ways Lee could increase the revenue totals in his plan. As it gains steam, how he does so will be vital. But right now, the important part is that Lee is putting forward an honest, smart plan that has huge potential. It’s been a long time since a Republican Senator has done that – especially someone as conservative as Lee is. He deserves credit for that.

Sen. Mike Lee Takes The Lead on Conservative Tax Reform

At the American Enterprise Institute today, Senator Mike Lee (R-UT) unveiled the broad outlines for his tax plan, which he will introduce into the Senate in the upcoming days. The plan focuses on broadening the base, lowering rates, consolidating tax brackets and simplifying the tax code. However, the emphasis of Lee’s plan is to eliminate the parent tax penalty. Here’s how Lee described the penalty today:

Under the current system, all seniors are entitled to the same benefits, based on their total lifetime contributions.

But parents are required to contribute to this system not once, but twice. First, when they pay their taxes, just like everyone else. And then again, by bearing the enormous economic costs of raising their children, who in time, of course, grow up to become the next generation of taxpayers.

Under the current system, parents receive no additional benefits for having contributed or sacrificed hundreds of thousands of additional dollars raising their kids.

Lee’s plan, appropriately titled the Family, Fairness and Opportunity Tax Reform Act, creates a $2,500 per-child tax credit applicable to both payroll and income taxes. This last part is particularly important. Many poor Americans don’t pay income taxes, but they do pay payroll taxes. Making the credit applicable to payroll taxes allows those low-income parents to benefit from it as well. This corrects the parent tax penalty for all parents.

The freshman senator emphasized later that the purpose of this credit was to correct an unfairness in the tax code, not to influence the childbearing decisions of Americans.

“My plan would simply level the playing field to treat all taxpayers more equally,” he said. “It’s not social engineering.”

The Family, Fairness and Opportunity Tax Reform Act would create two tax brackets. The first would be at 15% for individuals with incomes less than $87,850 (and double that for married couples). All income above those thresholds would be taxed at 35%. In addition, Lee would create a new mortgage interest deduction capped at $300,000 worth of principal and a new charitable deduction available to all taxpayers, not just those who file itemized deductions. Both of these are alterations to current popular deductions intended to distribute the benefits of them more evenly across the income spectrum. At the moment, high-income homeowners reap most of the benefits of the home interest deduction as they pay a large proportion of mortgage payments. Low-income individuals are also less likely to itemize their deductions so they are unable to take advantage of the charitable deduction in the current system.

Lee’s plan also eliminates special interest loopholes, the state and local deduction and repeals Obamacare taxes and the AMT. You can read the rest of it here. He estimates that it will raise revenue equal to approximately 18-20% of GDP, which is right in line with the historical average. The Joint Committee on Taxation will take it up in the near future after Lee officially files the bill and will score it. Hopefully others will look at the distributional impact of the plan as well. It’s a promising piece of legislation that deserves an honest debate and conversation. I’m looking forward to having it.

Legislators Are Like Kids

The Senate Finance Committee is determined to take on tax reform, but Chairman Max Baucus (D-MT) and Ranking Member Orrin Hatch (R-UT) have chosen a unique way of starting the process: they are asking their colleagues what tax breaks they want, not which ones they want to eliminate. Basically, they are starting from a blank slate and asking lawmakers what they want. The goal was to give Senators the chance to fight for their beloved tax breaks, since few would fight for the removal of favorable tax breaks.

Genu Steuerle of the Tax Policy Center summarized the benefits of the strategy a few weeks ago:

[I]dentifying losers is immensely unpopular among voters, and politicians shy away from it. Worse, they blast those from the other party brave enough to provide details.

But if Baucus sets a revenue target at the beginning of this tax reform exercise, the dynamic shifts—from simply identifying winners and losers to explicit trade-offs. Winners and losers march together. With a blank slate or zero base, every restoration of a tax break requires higher rates (even an alternative tax), especially if there are few or no alternative preferences to sacrifice.

But when the burden of proof changes, a lobbyist can appear to be helping his masters simply by saving a subsidy, even if the net benefit is smaller than in the old law. After all, preserving a preference in some form is success relative to a zero baseline.

So, have other Senators stepped forward to support their favorite tax breaks? Not exactly. Senators don’t really understand the process and are worried that supporting one tax break over another will anger certain interests. So far, submissions have been few and far between. Baucus is still convinced that the process will work and a few Senators are working on legislation supporting different tax breaks, but most are hesitant to join on this method of reform.

This reminded me of a passage from Michael Grunwald’s book on the stimulus where he explained the White House’s strategy of not force feeding legislation down Congress’s mouth. Instead, it tried to give them some autonomy over it in hopes of generating greater support and speedier passage. What the Administration found was that Congressmen were eager for guidance:

The cagey approach helped fuel the myth that Obama punted the Recovery Act to Congress. He never submitted a formal draft, and many Hill Democrats grew frustrated with his team’s refusal to nail down exactly what he wanted and what he needed in the bill.

As one Senate staffer puts it, most legislators are like kids: They say they want freedom, but deep down they crave guidance. So Democrats who had spent years demanding respect from the White House quickly decided that Obama’s team was too deferential. “People were like: Just tell us what the hell you want!” recalls Tom Perriello, a Virginia Democrat who had just been elected to the House.

Baucus and Hatch’s reform process differs from the Stimulus because the Stimulus didn’t create losers, as tax reform undoubtedly will. But, still, the two legislators should keep this in mind as they continue down this road. Legislators like a coherent direction about not just how the process works, but also what the limits are of their power throughout it. Right now, no one knows how many tax breaks they can or should fight for. They don’t know the likelihood of passage or how their support for different tax breaks will affect them politically. Everything is up in the air and many Senators are too scared to take part.

So Baucus and Hatch should be forewarned: starting from a blank slate sounds like a great idea, but like children suddenly confused by having free reign over their day, Senators are equally bewildered by having free reign over legislation.