Wednesday, July 20, 2011

A Pro-Growth Plan from the Gang of Six

There are a lot of known unknowns about the new “Gang of Six” budget proposal. But conservatives should hold back from trashing it. Why? There’s a large, pro-growth tax-reform piece in the plan that would lower tax rates across-the-board. This is a stunning reversal of the Obama Democrats’ soak-the-rich, class-warfare campaign.

The best part of the Gang of Six plan is a reduction in the top personal tax rate from 35 percent to a range of 23 to 29 percent. For businesses, the rate would drop in the same manner. And the corporate tax would be territorial rather than global, thereby avoiding the double tax on foreign earnings of U.S. companies. Finally, the plan would abolish the $1.7 trillion alternative minimum tax. That’s huge. It’s another pro-growth tax reform.

In a more perfect world, the Congressional Budget Office would score the pro-growth incentives of lower marginal tax rates in terms of a tax-revenue increase. That’s the history stretching back to JFK, Reagan, and George W. Bush circa 2003.

And right now, the Gang of Six package is the first real pro-growth tax reform of all the debt-ceiling plans. It acknowledges the need for a growth element in order to solve our budget bankruptcy and limit spending, deficits, and debt. It would boost the economy and broaden the base (by reforming or limiting numerous deductions). As a result, more income would be taxed at lower rates in a rising economy, throwing off a hell of a lot more revenues than we’re getting today. Rising revenues from lower tax rates are a good thing.

Now, there are glitches in this plan that cannot be overlooked. The biggest is the harsher treatment of capital gains. In a CNBC interview on Tuesday, Sen. Tom Coburn (R., Okla.) told me that the investment tax rate would rise to 20 percent from 15 percent. This is a black mark. It’s anti-growth. Coburn, however, also told me that the tax treatment of IRAs and 401(k)s would not change in this plan. That’s good.

Additional problems, however, are raised by Rep. Paul Ryan (R., Wis.). He notes first of all that the Gang of Six plan claims to increase revenues by $1.2 trillion relative to a “plausible baseline.” He also notes that the plan claims to provide $1.5 trillion in tax relief relative to the CBO March baseline. That’s important. But Ryan then reminds us that the CBO baseline assumes the expiration of the Bush tax cuts, which would increase revenues by a static $3.5 trillion.

So Ryan concludes that there’s a $2 trillion revenue increase. And he notes that this number could jump by another $800 billion from Obamacare taxes, which would increase revenues by $2.8 trillion.

Okay, this is tricky business. It’s a baseline-matching game. But let’s not get hung up on that right now. Let’s flesh out the details. Let’s see how the crony-capitalism deductions and loopholes will be treated.

So I’m not prepared to trash the Gang of Six plan. I am impressed by the lower marginal tax rates and tax simplification it contains. These are decidedly pro-growth measures. And we need growth.

If the economy were functioning decently, revenues as a share of GDP would move back towards 18 percent or more. And that would be a good place to balance the budget with spending restraints.

I get the uncertainty of the Senate Finance Committee regarding Social Security, health-care, and tax reform. I get that. But Rep. Dave Camp (R., Mich.) runs the House Ways and Means Committee, and he’s not going to let Sen. Max Baucus (D., Mont.) destroy the economy.

In the Gang of Six plan, there are a lot of planned spending cuts across-the-board for all the cabinet departments. There is spending-cap enforcement. And, importantly, the plan would repeal the CLASS Act, an Obamacare entitlement for long-term health-care insurance that would exponentially elevate future federal spending. This would mark the first step toward undoing Obamacare.

But -- and I acknowledge this weakness -- the health-care savings look inadequate and murky. And the Social Security reform is completely unknown. The cut-and-cap Paul Ryan budget, which would reduce spending by $110 billion in 2012, or $6 trillion over ten years, looks a lot more powerful than the Gang of Six proposal. Ditto for the Ryan domestic discretionary budget cut of $76 billion in 2012, which stretches out to $1.8 trillion in ten years. And of course, I acknowledge that two-to-one or three-to-one formulas for spending cuts and tax increases have always broken down in the past. You get the taxes but not the lower spending.

Nonetheless, with all the known unknowns and maybe some additional unknown unknowns, I still think it’s time to give the Gang of Six plan a chance.