Sunday, July 29, 2012

Bowles-Simpson: What am I missing?

The Bowles-Simpson deficit reduction plan is causing consternation among people with whom I usually agree.  But it has a couple of important features that I like--it cuts tax expenditures that tend to be both distortionary and regressive (such as the mortgage interest deduction) and it taxes investment income at the same rate as ordinary income.  This second feature essentially ensures implementation of the Buffet rule.

As it happens, the Tax Policy Center at the Urban Institute and the Brookings Institution evaluated the distributional impact of Bowles-Simpson relative to current policy.   Here is what they found:

Look at the column entitled "Percent Change in After-Tax Income."  Everyone takes a hit, but the hit in the lowest quintile is near zero--for the top one percent, the hit is almost three times higher than average; for the top 0.1 percent, it is four times higher than average.   This looks awfully progressive to me...