Alan Reynolds

New York Sen. Chuck Schumer and a half-dozen freshman legislators, reports the Los Angeles Times, "want to add tax credits and deductions to benefit narrow groups of largely middle-class constituents. Among potential beneficiaries: people with elderly parents in nursing homes, new parents, college students, volunteer firefighters and organ donors. ... Schumer's bill was modeled on proposals by Third Way, a liberal Washington think tank that President Clinton helped found."

In a recent column, "Moralizing and Politics," I found it admirable that Third Way economists were shunning the party line by adopting an optimistic approach and demonstrating that the "the middle class is shrinking ... because more people are better off." Unfortunately, sensible statistics do not always produce sensible policies.

The source of the Schumer proposals was a Third Way memo last July addressed to "progressive candidates" and written by Anne Kim, a lawyer and former aide to Rep. Jim Cooper, D-Tenn. It is all about campaign rhetoric -- "ways to talk about taxes if you believe that some ought to be increased." Candidates were advised to develop attractive language to support assorted tax breaks to narrow voting blocs, and also advised how to avoid talking about other taxes being raised to make up for the loss.

Promising special tax deductions and credits to specific groups of voters means, by definition, adding new "loopholes." In the similar proposals of Schumer and Third Way, special tax favoritism is to be granted only to parents of infants rather than parents of school-age children, for example. Third Way would also add tax breaks for couples with $75,000 incomes buying their first home, but not for couples with $35,000 buying their second home. Ironically, the Third Way memo also advises progressive candidates to propose "closing loopholes" to "make the tax code simple and fair." For example, "candidates can decide to choose a savings target -- such as $10 billion a year -- for closing loopholes."

In a Third Way press release claiming credit for the Schumer plan, "Kim acknowledged that there would be costs to the plan, but noted that 'there is plenty of fat in the tax code to pay for this.'" But that is not what her memo said. It said, "The proposals above lay out approximately $250 billion in tax cuts over 10 years." Schumer's similar plan is reported to lose $80 billion of revenue during its first four years, with only a one-year patch for the AMT -- but the 10-year revenue loss was unreported.


Alan Reynolds

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