To be sure, President Obama would also extend the bulk of the Bush tax cuts, and he wouldn’t pay for them either. Obama would let the tax cuts expire for families earning more than $250,000, which would save about $685 billion over ten years. But the real battle is over whether to make the Bush tax cuts permanent, or to merely extend most of them for a year or two until Congress attempts a broader overhaul of the tax code.
Like many Democratic reformers, the Republican Holtz-Eakin told lawmakers that he supports a broad tax overhaul that eliminates loopholes, lowers tax rates and "broadens the tax base" – another way of saying that more people should pay taxes. But this was where his argument became complicated. The Bush tax cuts affect the rates people pay in every tax bracket, and they include a slew of popular credits and deductions. How "permanent" can all that be if the end game is a fundamental overhaul of the tax code?
"A temporary extension," he said his prepared testimony, would "merely defer resolving the uncertainty about the tax outlook. A permanent extension would set expectations, permit long-range business planning and support long-term economic growth."
What would tax reform look like? Holtz-Eakin certainly would not want to raise any of the tax rates, especially those for high-income people. He would also keep the lower tax rates on dividends and capital gains. "The most important thing to recognize is that tax reform is built around the objective of permanently lowering marginal tax rates," he said. "Any plan that does not seek to permanently maintain or lower marginal rates is moving in the wrong direction."
But if the goal is to push marginal rates even lower, taxes have to go up somewhere to prevent an even bigger drain on revenue. In his testimony, Holtz-Eakin talked vaguely about a "consumption-oriented tax." That probably would not mean a national sales tax or a European-style value-added tax – ideas that Republican leaders vehemently oppose. Holtz-Eakin’s approach would probably be to reduce or eliminate taxes on money that people save and invest, effectively putting more of the tax burden on consumers.
But to avoid losing even more revenue, other taxes would still have to go up somewhere. Indeed, Holtz-Eakin offered a broad hint that he would abandon many of the Bush tax breaks for middle- and lower-income people. "It is useful to recognize that not all the components are equal from a growth perspective," he said in his prepared testimony. "Provisions for refundable tax credits, marriage penalty relief and other targeted incentives make no contribution to growth incentives." That list could include expansions of the Earned Income Tax Credit, which channels billions of dollars to low-income working parents; the Child Tax Credit; and tax breaks for college tuition.
To be sure, the tax system is so packed with special tax breaks that the options of an overhaul are almost endless. But a report on tax reform by top Treasury officials in 2002, during Bush’s first term, cautioned that all variants of a consumption tax would tend to shift more of the tax burden from higher-income to middle-income households. It also noted that all options for fundamental tax reform "would in varying degrees run counter to the Administration’s tax policies" and mentioned the Child Tax Credit as an example.
Making all the Bush tax cuts truly permanent would become even less manageable if the goal of tax reform is also to increase revenue. Holtz-Eakin made it clear he would rather not raise additional revenues, saying that "the fundamental budget problem is excessive spending, not a paucity of tax receipts."
Over the long haul, even some prominent liberal analysts agree that the real need is to slow the growth of entitlement programs like Social Security and Medicare. But most proposals to accomplish that would take effect gradually and wouldn’t make a serious impact on the spending for until at least the end of this decade. Meanwhile, President Obama has himself proposed to freeze non-security discretionary spending for three years. But even if those savings materialize, they are a drop in the bucket.
Holtz-Eakin argues that the real solution is to spur faster economic growth. But he doesn’t argue that the United States can "grow its way" out of its deficits. Something has to give, but he isn’t saying what it is.
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