The Committee for a Responsible Federal Budget argues, “Tax reform is near the top of the agenda in Washington. This is encouraging because individual and corporate income taxes are overly complex, anti-competitive, inefficient, costly to comply with, and littered with nearly $1.6 trillion of deductions, credits, and other tax preferences. Creating a tax code that is more straightforward, fair, efficient, and competitive will boost economic growth, which would not only improve the nation’s fiscal situation but lead to higher wages and incomes.” But the budget conservatives have a big caveat: “As an absolute minimum standard, tax reform should not add to the debt.”
That almost certainly will not be the case, as the House, Senate and president collectively refuse to touch entitlement spending and push for higher defense spending. The argument for revenue-neutral tax reform is sound:
As a share of the economy, debt held by the public is currently 77 percent of Gross Domestic Product (GDP), which is higher than it’s been since the end of World War II and nearly twice the average of the last half-century. On its current path, debt will exceed the size of the economy by 2033 and exceed 150 percent of GDP by 2050. High and rising debt threatens economic and wage growth, the government’s ability to respond to new challenges, and the nation’s fiscal sustainability. Policymakers need to reduce the debt, not add to it.
Indeed, for every dollar added to the debt, there will be a dollar added to future taxes needed to pay it off. There is no free lunch. The argument that tax cuts “pay for themselves” is flat-out false:
While well-designed tax cuts can promote economic growth that leads to more revenue, there is no realistic scenario that this “dynamic revenue” will be as large as the initial tax cut. In order for a tax cut to pay for itself, it would need to grow the economy about $4 to $6 for every dollar of revenue loss. There is no historical case of a tax cut achieving this goal. Economic analysis has shown that tax cuts can only pay for themselves when the top federal rate is much higher than it is today — many economists believe the top rate would need to be above 60 percent. At best, the dynamic revenues from growth could pay for a fraction of the tax cut’s cost. Given our fiscal situation, tax cuts should be fully paid for without dynamic revenue so that the gains from economic growth can be used to address our mounting debt.
Republicans now talk like liberals of yesteryear — bigger government (achieve health-care reform by other means and grow the rest of the budget), no responsible approach to entitlements — and pretend to be fiscally conservative by penny-pinching small but popular discretionary items (e.g., the National Institutes of Health). Frankly, the “never raise taxes” mantra is as out of touch with reality as opposition to gay marriage is. If both Republicans and Democrats want to spend more, they will need to tax more. If they don’t want to tax more, they need to reduce spending in the area driving the debt, entitlement spending.
In the Obamacare context, Republicans want to repeal the Obamacare taxes and then substitute them with their own expensive plan (e.g., tax credits, health-care savings accounts). Republicans want to remove taxes and still spend on health care. Fiscal grown-ups emphatically should reject that. The only responsible course would be to keep the existing taxes and/or raise revenue by other means.
In the overall tax reform debate, House Speaker Paul Ryan (R-Wis.) wants to use an unwise border tax adjustment to help pay for enormous tax cuts for individuals and businesses. Sen. Lindsey Graham (R-S.C.) opined that the House tax plan will not fly. “The Congress is stumbling. Republicans in the Congress, we are all tied up in knots. The House is talking about a tax plan that won’t get 10 votes in the Senate,” he said on “Face the Nation.” “So it is not just the administration that has got problems. Republicans in the House and the Senate have problems, and I hope we will get our act together.”
In sum, tax reform has much to recommend it, but a net tax cut does not — nor does a border tax adjustment gimmick. If Republicans want tax simplification and fairness and still want significant spending (on health care and defense), they must pay for it. Period.
Put differently, the no-tax-hike-no-matter-what mantra has outlived its relevance and fiscal purpose. Unless accompanied by the “no spending hike no matter what” mantra, pledges not to raise taxes amount to expanding debt. Conversely, if Republicans and Democrats alike want to spend more and preserve the status quo on entitlements, they had better face up to the necessity of increasing taxes. Too bad there is no fiscally honest party to advance that message.