The Deficit and Tax Reform

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Paul Krugman really hates the deficit commission’s report working proposals:

If you’re sincerely worried about the US fiscal future — and there’s good reason to be — you don’t propose a plan that involves large cuts in income taxes. Even if those cuts are offset by supposed elimination of tax breaks elsewhere, balancing the budget is hard enough without giving out a lot of goodies — goodies that fairly obviously, even without having the details, would go largely to the very affluent.

But as Ezra Klein notes, part of the commission’s mandate was to find some way, politically, that deficit reduction can be achieved in the world we live in. Ezra thinks the commission will flunk that test because its members won’t be able to agree on a plan which would then offer members of Congress the cover of “bipartisan consensus.” And Ezra’s right that that’s going to be a problem.

But this leads me back to Krugman’s complaint: Balancing the budget is going to be hard fiscally, but also politically– particularly if it requires voter-angering tax hikes. By my read the commission’s proposal to lower individual tax rates while closing loopholes like the mortgage interest deduction represent an attempt to address that. Individual income tax rates are easy for the average American to understand, and if people can see those reduced in a tangible way they may be less likely to revolt over countervailing increases, including a possible gas tax. This has always been a key theory behind reform of the tax code, as I understand it, and was fundamental to the Washington’s last big successful tax reform.

Update: “Report” was not the best choice of words, as the commission is still weighing options and has yet to vote. As Ezra puts it, it’s more of a draft proposal. Also, some commenters didn’t like that I described the mortgage interest deduction as a loophole. That’s probably not quite the right word, either. But it’s still a special tax preference whose foregone revenue winds up pushing individual income tax rates higher.