Committee for a Responsible Federal Budget

Hatch Calls for Tax Reform in the 114th Congress

Jan 6, 2015 | Taxes

If tax reform is going to happen in the 114th Congress, Sen. Orrin Hatch (R-UT) will be a central figure as the incoming Chairman of the Finance Committee. In a National Review op-ed yesterday, he reiterated seven principles for tax reform that he first outlined in a report last month. Many of these principles are frequently discussed as important goals of tax reform, but lawmakers may disagree about the best course to achieve them.

Hatch first notes the serious need for reform:

Everyone agrees that the American tax system is broken and in need of reform. It stifles job creation, innovation, and competitiveness. It’s counterproductive, confusing, and a serious drag on the economy. Simply put: Tax reform is no longer an option but an obligation.

We certainly agree that after nearly 30 years without a major reform and the tax code getting more and more complex since then, the time is now for tax reform. Even setting aside fiscal concerns, it should be done to improve the code for taxpayers and the economy alike.

Hatch's seven principles involve promoting:

    1. Economic growth
    2. Fairness
    3. Simplicity
    4. Permanence
    5. Competitiveness
    6. Savings and investment
    7. Revenue-neutrality

The first three he mentions as guiding principles for the last major tax reform effort during the mid-1980s. In particular, he says:

Tax reform should promote growth in the economy and reduce economic distortions. It must eliminate the uncompetitive nature of the code and reduce disincentives to work, entrepreneurship, savings, and investment.

Tax reform should reduce tax expenditures to broaden the tax base and simultaneously lower tax rates. A broader base coupled with significantly lower tax rates is the foundation of what would be a much fairer tax system. 

We also need a simpler system. Tax reform should reduce complexities in the tax code to lower compliance burdens, increase efficiency, and free up resources for productive activities, including job creation.

Principles 4 and 5, he argues, respond to more modern concerns about the increasing amount of temporary provisions in the tax code and the fact that the U.S. corporate tax rate has not been reduced in response to other countries' reductions.

On the revenue target, Hatch argues that revenue-neutrality is the way to go:

Lastly, tax reform should embrace the principle of revenue neutrality. If we’re scouring the tax code looking for ways to squeeze more revenue to fuel government spending, we’re not reforming the tax code, we’re raising taxes. It’s as simple as that. Tax reform should not be used as an excuse to raise taxes on the American people. Any such effort is a needless distraction.

On the whole, Hatch’s principles seem to be a useful guide for tax reform, though given the current fiscal situation, revenue-neutrality should be viewed as a floor not a ceiling. Ideally, tax reform would be a revenue-positive component of a broader budget deal that also includes entitlement reform. At minimum, revenue-neutrality should be achieved using conventional scoring, against a current law baseline, and over the long run.

If true tax reform efforts get underway, as we hope occurs, we have a number of resources to inform the discussion, including Tax Break-Downs of specific tax expenditures, an overview of corporate tax reform, a Corporate Tax Reform Simulator where users can create their own reform plan, and numerous options in our budget simulator. These resources show the many ways lawmakers can improve the tax code, the economy, and the budget through tax reform.

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