There is a breathless article in today's Washington Post by Lori Montgomery detailing a study by JEC Democrat staff of the House GOP budget's tax reform plan.  The headline of the report is that the tax plan, if implemented, would be a net tax hike for middle and upper-middle income households, and a giant tax cut for high income households.

The only problem is that the analysis contains a fatal flaw that Lori Montgomery should have seen.  The fact that she did not is troubling, to say the least.

The House GOP budget empowers the Ways and Means Committee to craft a tax reform plan that has two major components:

1. A top personal and business tax rate no higher than 25 percent, and
2. A tax revenue target (long-run) of between 18 and 19 percent of GDP

The JEC report actually does a decent job of modeling the former.  They adopt a dual-rate structure of 10 and 25 percent (similar to the Ryan Roadmap plan) and eliminate most of the biggest tax deductions and exclusions to pay for it (with the notable exception of the exclusion for interest on municipal bonds, which would not help their argument).  The report finds an income tax distribution after reform that is more regressive than its predecessor.  Tax cuts for the rich, and all that.

There's just one problem--the report is worthless.  It completely ignores the crucially important second directive of the House GOP budget--target tax revenues in an 18-19 percent of GDP range.  Instead, the report relies on a Tax Policy Center analysis (cited in the report) which assumes a current law baseline of tax revenues, instead.  These are very, very different revenue baselines.  Under current law, Taxmageddon happens in December.  Taxes shoot up to a long-run revenue target of closer to 21 percent of GDP in a current law baseline.

Why is that important?  Because the House tax reform outline is not intended to raise 21 percent of GDP in tax revenues.  It is intended to raise 18-19 percent of GDP.  When you're trying to raise more tax revenue in either case with a top tax rate of 25 percent, the extra money has to come from additional base broadening.  That additional base broadening, by definition, would have to come from further down the income spectrum.  But none of this matters because this isn't the House GOP budget's tax plan.  It's a Frankenstein's monster version of it, neutered of its revenue-neutral features.

Furthermore, using a current law baseline makes tax rate relief look huge for top-bracket taxpayers.  If current law is the starting point, the pre-reform top rate is not 35%, but 39.6% (over 40% when PEP and Pease are factored in).  The capital gains rate is not 15%, but 23.8% (when the Obamacare investment surtax is included).  Again, monkeying with the baseline has made this report worthless.

Nice try, JEC Democrats.  And one would hope that the Washington Post won't fall for this trick again.

Posted by Ryan Ellis on Wednesday, June 20, 2012 11:08 AM EDT

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