Stale debate on tax rates has diminishing returns

Republican Ronald Reagan and Democrat John F. Kennedy, icons of their parties, both called for lower income tax rates to boost growth. The GOP has not let go of the idea since. Nor has President Obama, who despite calling for a higher tax rate on high earners, would preserve the vast bulk of the 2001 and 2003 Bush tax cuts.

But as Mitt Romney said of George W. Bush last night, that was a different time.

In 1960, when Kennedy was elected, the top income tax rate was 91 percent. In a 1962 speech to the Economic Club of New York, Kennedy said:

“Our present tax system, developed as it was, in good part, during World War II to restrain growth, exerts too heavy a drag on growth in peace time; that it siphons out of the private economy too large a share of personal and business purchasing power; that it reduces the financial incentives for personal effort, investment, and risk-taking.”

In 1980, when Ronald Reagan was elected, the top tax rate was 70 percent, still clearly a drag on growth. Reagan lowered the top rate to 50 percent. He ultimately got it reduced to 28 percent by 1988. But he only achieved that through his landmark 1986 tax reform, negotiated with Sen. Bill Bradley, a New Jersey Democrat.

The current top rate is 35 percent. But tax breaks have mushroomed. The government will dole out tax breaks of more than $1.1 trillion by 2014.

Obama has taken little if any initiative on tax reform. Romney promises tax reform, and has a credible idea, borrowed from Harvard economist Martin Feldstein, and New American Foundation fiscal director Maya MacGuineas, to limit the total amount of deductions a taxpayer can claim. The plan cleverly avoids the nearly impossible political challenge of eliminating hugely popular deductions and exclusions for mortgage interest, health insurance, municipal bonds, and the like.

But it is highly unlikely that Romney can get the revenue he needs to cover an across-the-board tax cut and increase in military spending by this reform. That does not diminish the merit of a limit on tax deductions. It is much more politically feasible than the “zero plan” by Bowles Simpson which dramatically lowers all rates by eliminating tax breaks.

If Obama would take tax reform more seriously, instead of clinging to the Bush tax cuts, and if Romney would be more realistic about the revenue needed to fund Medicare and the rest of the government, instead of clinging to a Reagan policy enacted when tax rates in fact were confiscatory, maybe we could get somewhere.

Carolyn Lochhead