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November 25, 2012

Checklist to see whether debt reduction is real

(Continued)

WASHINGTON — Taxes

A deal that specifies where revenue would come from would lay important groundwork for next year’s follow-up bill enacting actual changes in tax laws.

The biggest clash has been over whether to raise income tax rates on earnings over $200,000 annually for individuals, $250,000 for families. Obama wants to let them rise next year to a top rate of 39.6 percent but has suggested he would compromise. Boehner and other Republicans oppose any increase above today’s top marginal rate of 35 percent. Instead, they advocate lower rates and eliminating or reducing unspecified deductions and tax credits. Settling that would resolve the toughest impediment to a deal.

Raising money from higher rates, closing loopholes or a combination of the two would create real revenue for the government. The problem is many tax deductions and credits, such as for home mortgages and the value of employer-provided health insurance, are so popular that enacting them into law over objections from the public and lobbyists would be extremely difficult.

With the price tags of tax and spending laws typically measured over a decade, delaying the implementation date can distort the projected impact of a change on people and the government’s debt.

Tax cuts written to expire in a certain year can put future lawmakers under political pressure to extend it. That is what Obama and Congress face today with the January expiration of tax cuts, including many enacted a decade ago under President George W. Bush.

Even more questionable are assumptions that overhauling tax laws will boost economic activity and thus produce large new revenues for the government. Many Republicans and ideologically conservative economists contend that’s the case, but most economists say there is no sound way to estimate how much revenue can be generated from strengthening the economy by revamping the tax system. Many believe the amount is modest.

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