Maya MacGuineas: Revenue Neutral, Gimmick Free Tax Reform Is Hard -- And Worth It
Maya MacGuineas is president of the nonpartisan Committee for a Responsible Federal Budget and head of the Campaign to Fix the Debt. She recently wrote a guest post for Forbes.com. It is reposted here.
Tax reform, meaning making changes so we raise revenues more sensibly, is far more desirable than tax cuts where the focus is on reducing tax burdens.
First, much of the emphasis on reform has been how low we can get rates. And this is an important objective to promote growth. But so too are some of the base broadening measures that are being considered to offset those costs. If structured smartly, reducing rates and broadening the base can both help grow the economy-and our demographic challenged economy definitely needs all the help it can get.
Take the home mortgage interest deduction for instance, which isn't just a subsidy from renters to owners-with very concerning distributional outcomes-it encourages us to direct too much of our money to housing compared to other investments by de-leveling the playing field. Sure the home mortgage deduction has been branded as one of the staples of the American economy, but in reality, it is a break that funnels trillions of dollars to the building and lending industries. (And there are parts that are just plain boondoggles - how did we ever decide we should be subsidizing vacations homes?)
Likewise, reforming or eliminating the healthcare exclusion, which contributes to spiraling healthcare costs and over consumption by funneling more money to health insurance than there would otherwise be, would be growth enhancing. So little rigor goes into analyzing the effects of these tax breaks, and so many are not worth the cost, it would be smart to wipe the slate clean and then justify each tax break that Congress wants added back. That exercise would free up trillions of dollars for lower tax rates.
Tax reform that aggressively broadens the base would also have the advantage of accommodating lower rates without adding to the debt. Deficit financed cuts undermine the growth from reform because the higher growth from cuts can easily be outweighed by the negative economic effects of the additional debt.
We are particularly vulnerable to the negative economic consequences of too much debt given our current fiscal situation. When President Bush entered office and pursued tax cuts, the budget surplus was 2.7% of GDP. Today we have a deficit of 2.9%. And with Bush the debt was 33% of GDP; today it is 77%. So further blowing a hole in the fiscal situation could do a great deal more damage to the economy.
To avoid owning the decision to borrow and add trillions to the debt, lawmakers may try to hide behind budget gimmicks.
One budget option that is being considered and should be rejected is monkeying with the baseline. By assuming that a number of expiring tax provisions remain in place, this would add half a trillion dollars to the debt.
A second gimmick will be assuming growth affects that are too aggressive. This is not the time for policymakers to trot out multiple sets of growth scores that are more generous than those from the official scorekeepers. Smart reforms will grow the economy, but they won't create miracles, and we should stick with realistic estimates.
And there's the same old bag of tricks that has been used too many times before including Roth IRAs and pensions smoothing which shift around the timing of revenues to make the policies appear less costly than they are. If lawmakers were to put the same amount of time and energy into making the tax code simpler, fairer, and more competitive as they are in devising gimmicks to hide the true cost of tax cuts, we would come out far ahead.
So the only real argument against paying for reforms is that it's hard. And Congress doesn't like doing anything that's hard these days. There are those who say just forget about paying for reform and rely on bogus claims the tax cuts will pay for themselves ultimately. For those who want to grow the economy, this is a mistake; for those who have for years been concerned about the debt, this is hypocritical; and for those who want a smaller government, this is a lost opportunity.
This is an incredible moment for tax reform, where we can really get a reform bill across the finish line. A pro-growth, revenue neutral, gimmick free bill could achieve great things for the economy. Lawmakers should do the hard work of getting us there.
"My Views" are works published by members of the Committee for a Responsible Federal Budget, but they do not necessarily reflect the views of all members of the Committee.