Department of Predictions

My fearless prediction for 2013: no matter who wins the presidency, he will propose a wholesale overhaul of the federal tax system.

A tax overhaul will provide the political cover to cut spending, increase revenue, and shift the tax burden. (Tax deductions and exclusions are really a form of spending; in fact, they cost the government more than $1 trillion a year.)

Of course, Obama and Romney will approach a tax overhaul with different goals.

Romney will want to shift the tax burden away from the "job creators" in the belief that a rising economy will eventually benefit everyone. He says he wants any changes to be revenue neutral, but he's said a lot of things over the last six or seven years. Tax reform will give him the political cover he needs to stay off Grover Norquist's naughty list. 

Obama will want to shift the burden towards upper income households whose incomes have grown disproportionately in recent years. He's already said he intends to balance spending cuts elsewhere in the budget with modest revenue increases on the wealthiest.

The chart below, from the Century Foundation, illustrates the point from which the whole effort will start.

Note that, except for the lowest two quintiles, each income group's share of total taxes is roughly the same as their share of before-tax income. (Government transfers, such as social security and Medicare payments, as well as the value of food stamps, are included as income in the graph.)

It's a progressive system, but not the picture of free-loading that Romney presented behind closed doors.

A fuller analysis would show that taxes are less progressive than they used to be because of recent tax cuts that largely benefited the wealthy, payroll tax increases that have a greater impact on lower incomes, and an increase in government transfers to wealthier families (e.g., Medicare and Social Security payments that are not means-tested). 

This election will determine how the relative heights of these bars change over the next few years.