Thursday, November 1, 2012

What is Meant by "Broadening the Tax Base"?

My prior post is posted and being discussed at One of the questions that came up was the following:

I have a question to which you might not know the answer, since it is a matter of a phrase used by someone you quote. Feldstein says,

The key question raised by the Romney plan’s critics is whether this revenue loss can be offset by broadening the tax base of high-income individuals.

I don’t understand what is meant by the phrase “broadening the tax base of high-income individuals.” Do you have any idea what he meant by that?

My reply was as follows:

That's a very good question and points to one of the problems that I have with the Romney tax plan. Romney is very explicit about what goodies his plan offers. On this web site, he lists the 20 percent cut in all marginal rates, elimination of AMT and estate tax, and other items. All that he says there about broadening the tax base is "America’s individual tax code applies relatively high marginal tax rates on a narrow tax base." A document on Romney's web site states "He will pursue a conservative overhaul that applies lower and flatter rates to a broader tax base". Both of those sound like they might be talking about "broadening the tax base" to more taxpayers (not just more untaxed income) but it's not clear. Another document on his web site states the following:

In the long run, Mitt Romney will pursue a conservative overhaul of the tax system that includes lower and flatter rates on a broader tax base. The approach taken by the Bowles-Simpson Commission is a good starting point for the discussion. The goal should be a simpler, more efficient, user-friendly, and less onerous tax system. Every American would be readily able to ascertain what they owed and why they owed it, and many forms of unproductive tax gamesmanship would be brought to an end.

Here, he could be talking about untaxed income. Feldstein's study is looking just at deductions taken by upper-class workers. As I mentioned, this mainly includes home mortgage interest, state and local taxes, real estate taxes, and charitable deductions. Feldstein is explicitly excluding credits like the standard deduction, child tax credit, and earned-income tax credit (EITC). However, I'm not aware that Romney has totally ruled these out. As a result, there are concerns such as the following one expressed at this link.

But nowadays the phrase “broadening the tax base” is often used in conjunction with calls for more people to pay federal income taxes, with nearly half the population accused of paying no taxes at all. Of course, that’s not really true, as many of those who end up paying no net federal income taxes oftentimes do pay sales taxes, Social Security and Medicare payroll taxes and other forms of taxation. In a recently released video from a campaign fundraiser, Romney accuses the 47 percent of the population who pay no federal income taxes of not taking responsibility for their lives and says he can't worry about them.

However, those who qualify for refundable tax credits like the Earned Income Tax Credit are rightly fearful that the phrase “broadening the tax base” could mean ending the EITC as we now know it. The EITC actually was expanded because of the deal that President Reagan struck with Congress back in 1986 to get his landmark tax reform legislation passed. He was willing to trade lower tax rates for tax breaks like the EITC, which up to then had covered relatively few people since its introduction in 1975.

That's what I think is so irresponsible about the Romney tax plan. If he is elected, he will have to push for the specific goodies that he has promised. However, the act of "broadening the tax base" will likely become an argument between those who think we should limit deductions on the rich and those who think we should limit credits so as to tax more of those 47 percent who reportedly pay no federal income taxes. As a result - the goodies get passed, little or nothing get done on base-broadening, and the deficit goes up. If they were laying odds in Vegas and I was forced to bet on an outcome, that is the one that I would bet will occur if Romney is elected.

About Me

I became interested in U.S. budget and economic matters back in 1992, the first time that I remember the debt becoming a major issue in a presidential election. Along with this blog, I have a website on the subject at I have blogged further about my motivations for creating this blog and website at this link. Recently, I've been working on replicating studies such as the analysis at this link.

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