The Costs of Tax Policy Uncertainty And the Need for Tax Reform
The Costs of Tax Policy Uncertainty And the Need for Tax Reform
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I. Introduction
The American Taxpayer Relief Act of 2012 (ATRA, P.L. 112-240) may be more significant for what it does not do than for what it does. Hopes for a ‘‘grand bargain’’ were not realized. In fact, ATRA does (almost) nothing to address the major fiscal problems that the United States continues to face.
No one seems pleased with ATRA. Noticeably absent were the self-congratulations among members of Congress that usually accompany the passage of significant legislation[1] — and for good reason. Even the bill’s title leaves something to be desired. The ‘‘Act of 2012’’ was not passed by Congress until 2013.
The primary focus here is not on the broader merits or demerits of ATRA, but rather on the issue of tax policy uncertainty. The fiscal cliff represented an extreme case of (manufactured) policy uncertainty. A growing body of research suggests that policy uncertainty imposes substantial economic costs in and of itself. ATRA substantially lessened U.S. tax policy uncertainty over the very short term by, for the most part, making permanent the Bush tax cuts.
However, all is not well. Policy uncertainty re- mains high. Under ATRA, added revenue will come from taxpayers at the top of the income distribution, but that will barely make a dent in the deficits that the United States has been running. Based on projections from the Congressional Budget Office, the Joint Committee on Taxation and the Office of Management and Budget, Veronique de Rugy shows that (over the next 10 years) ATRA is expected to add $332 billion in spending and $620 billion in added revenues. By contrast, projected deficit spending over the same 10 years is order of magnitudes larger than the projected deficit reductions from ATRA.[2] A strong recovery from the Great Recession would be a big help, but major structural problems would still remain.
Post ATRA, the problem of sequestration remains front and center. ATRA extended the start date for sequestration called for in the Budget Control Act of 2011 from January 1 to March 1. Even those wanting to cut the budget do not want to do so in the Procrustean manner laid out in current law. Thus, those cuts are unlikely to materialize, but what will take their place is anyone’s guess.
The Affordable Care Act (ACA) also remains a source of some tax policy uncertainty. As enacted, the individual mandate is set to start at the beginning of 2014. However, the tax is so low that it will be advanta