A Response to Holtz-Eakin's Four Steps for Tax Reform

Last week, we wrote about American Action Forum president and former CBO director Doug Holtz-Eakin's four steps for tax reform. These involved:

  1. Agree to have a progressive tax system
  2. Agree on a top rate
  3. Agree on a revenue target
  4. Scale back tax expenditures to meet those targets.

At the Committee for Economic Development's Back in the Black blog, Joe Minarik makes a response to those steps. Coming from the perspective that tax reform will have to raise revenue, he suggested that while Holtz-Eakin's steps would get to a workable solution, he would amend them slightly and put them in a different order. His steps are:

  1. Agree on a revenue target for both individual and corporate income taxes.
  2. Agree on a distributional target.
  3. Limit tax expenditures to achieve the best possible tax base.
  4. Set tax rates and other parameters to achieve the prior objectives.
  5. Repeat steps one through four as necessary.

A main difference between Minarik's and Holtz-Eakin's steps is the order of base-broadening and rate-cutting. Minarik argued that by putting the base-broadening step last, Holtz-Eakin opened up the possibility that there would be no way to meet the revenue target. By putting the rate-cutting step last, lawmakers could ensure that the rates and other parameters of the tax system met the targets agreed on.

Finally, on the last point, Minarik noted that the 1986 reform did not come in one fell swoop. It went through seven distinct versions, as he counts it: two by the Reagan Administration, two by the House, two by the Senate, and the final product of the conference committee. Clearly, there will need to be a lot of negotiation involved with overhauling the tax system. But it will surely be impossible to do it if lawmakers don't start trying.

Read the full CED blog post here.