The Tabarrok Stimulus Plan

Alex Tabarrok does not approve of the economic stimulus plans being contemplated on Capitol Hill, and he is not alone. But I'm not sure that his alternative proposal really does the trick. A summary:

The IRS knows how much income that each taxpayer reported last year. So let's cut everyone's marginal tax rate based on last year's income. In other words, suppose that last year Joe earned $66,520 which puts him in a 25% tax bracket. Joe's tax schedule this year will be exactly the same as last year except for every dollar earned above $66,520 the tax rate drops to 15%. We do this for all taxpayers so that each taxpayer has their own schedule and for each taxpayer there is a decreasing marginal tax rate.

Note that this plan increases the incentive to work and it doesn't increase the deficit. In fact, the Tabarrok plan increases tax revenues! The key is a marginal tax cut with a different margin for every taxpayer based upon last year's return.

There are several problems with this, so far as I can see.

1. It is unclear whether Tabarrok intends for this tax break to apply for this year's filers or next year's. If it is for this year's filers, then there will be no incentive effects, since last year's incomes are what are being taxed. You can't incentivize past behaviors. If it for next year's filers, then one of the main intentions of fiscal stimulus -- it can jump-start an economy more quickly than monetary policy -- will be irrelevant.

2. It simply isn't clear that this would boost tax revenues as a percentage of GDP, or even keep them neutral. There would have to be a growth mechanism built in. Gov't budgets have spending increases built in to the system in anticipation of increased revenues from inflation, population expansion, and wage increases. To ignore that fact is silly. Wages may be sticky, but not perfectly so. In order for this proposal to be revenue-neutral (or better), it should be understood that most workers get some sort of raise in nearly every year.

3. It seems overly complicated. The job of tax filers/preparers would become much more difficult, while processing and enforcement for the government would also become harder. It should be a goal to make the system more stream-lined and efficient, but this plan would seemingly go the opposite.