Greg Mankiw, writing in the New York Times, commends the Bowles-Simpson draft report on deficit reduction for proposing to eliminate a variety of tax credits while dramatically lowering personal income tax rates. The package, says Mankiw, isn’t so much a tradeoff for fiscal conservatives as a two-fer: both tax cuts and spending cuts. That’s because, he explains, a tax credit is functionally indistinguishable from a spending program. Indeed, it hardly matters to a special interest whether its particular economic activity is favored with a spending program or a tax credit.
Mankiw’s piece is a good read and it effectively makes the case for that view of tax credits. But it should be pointed out that the overall package is not a tax cut. Indeed, the co-chair’s draft proposal envisions the overall tax burden reaching 20.5 percent of gross domestic product by 2020. President Obama’s 2012 budget has taxes at 19.8 percent of GDP, and taxes have historically averaged 18 percent of GDP. In addition to eliminating tax credits, the proposal calls for higher rates on capital gains and dividends and the elimination of accelerated depreciation.
According to Mankiw, the Bowles-Simpson plan is “far better than the status quo.” Indeed, it cuts spending from 32.9 percent of GDP to 20.5 percent by 2040. But an even better plan would recognize that further deficit reduction can be achieved without raising the tax burden at all. A good place to start would be repeal of Obamacare, which raises federal spending by $2.5 trillion over its first full decade of implementation.
For more on the Bowles-Simpson plan, see also Alison Acosta Fraser’s Heritage Foundation paper, “Bowles–Simpson Commission Co-Chair Report: A Good and Welcome First Step.”