Freedomnomics

Article published Thursday, July 21, 2011 at Fox News.

Pelosi Is Right -- The Gang of Six Plan Is Not Ready for Prime Time

By John R. Lott, Jr.

Democratic House Minority Leader Nancy Pelosi (D-Calif.) has it right. The so-called "Gang of Six" proposal to increase the debt ceiling is "not ready for prime time."

The extremely short document is vague, and if six Senators can't agree on what the individual income and corporate tax rates are going to be or how much some of the cuts will be or where they will really be made, how does anyone expect the Democrat Senate, the Republican House, and President Obama to agree on anything.

For a proposal whose text is just over two pages long, one wonders why they need to have a slightly longer than one page executive summary. Take some of the central proposals:

-- Reform of individual income tax must generate $1 trillion in additional revenue through the elimination of tax deductions. The elimination of deductions is to be partially offset by "establishing three tax brackets with rates of 8 [to] 12 percent, 14 [to] 22 percent, and 23 [to] 29 percent."

-- For individual income tax rates are to be cut so as to offset : "establishing three tax brackets with rates of 8-12 percent, 14-22 percent, and 23-29 percent."

-- There is a similar reform of corporate income taxes with the new rates to be "between 23 percent and 29 percent, rais[ing] as much revenue as the current corporate tax system."

-- "Tax reform must be projected to stimulate economic growth, leading to increased tax revenue."

What deductions are to be eliminated or cut? Four to eight percentage point ranges for income tax rates are big ranges. Does anyone have any doubts that Obama and the Democrats will want those rates at the very top of the ranges, while Republicans will want the rates as low as possible?

Who decides if a change in taxes is even stimulative?

Just look at the debate over the last few years. President Obama keeps pointing to the tax cuts that he supports, but his tax cuts actually discourage work for one simple reason: they increase marginal tax rates. Obama's tax cuts increase marginal tax rates because they are phased out as people make more income. You get the earned income tax credit or the college tuition credit but as you earn more money more of those credits are taken away from you. Those lost tax benefits are on top of the unchanged official marginal tax brackets.

The Republican approach has been to lower the marginal rate that individuals face so that they get to keep more of each additional dollar that they make.

There is also no reason to believe that future negotiations are going to be any easier than past ones or that the parties aren't going to try to change the agreement when they actually start negotiating.

What does one make of sections of the proposed agreement such as this: "Judiciary would find an unspecified amount through medical malpractice reformĒ (emphasis added). If Democrats say that their proposal obtains zero dollars in benefits and the Republicans put forward something that saves hundreds of billions, canít both sides legitimately claim that they have kept their part of the deal?

Nancy Pelosi has it right, this proposal has an almost uncountable number of holes in it. This fig leaf allows politicians to increase the debt ceiling now with the hope that they can later make an agreement later on cutting the deficit. If they canít do it now, they canít do it later.

John R. Lott Jr. is a FOXNews.com contributor. He is an economist and the author of "More Guns, Less Crime (University of Chicago Press, 2010), the third edition of which was published in May.".

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