Ryan-Brady tax plan the right way to reduce federal revenues
© Greg Nash

Zero does not equal minus three. This is incontrovertibly true. But many involved in the tax reform debate are acting as if zero (revenue neutrality) does equal minus three trillion, the approximate amount by which taxes will be cut relative to baseline by the tax reform proposals they support.

The budget resolution reported out of the House Budget Committee provides for a reduction in federal revenues of $1.1 trillion over 10 years. This is meant to allow for the repeal of some ObamaCare taxes. Tax reform instructions are provided, but tax reform must be deficit neutral.

The Ryan-Brady Better Way tax reform plan has been estimated to reduce federal revenues by $2.4 (Tax Foundation) to $3.1 trillion (Urban Institute-Brookings) over 10 years before taking economic growth effects into account. Since the border tax adjustment (BTA) is no longer part of the plan, those figures would now be approximately $1 trillion higher, or $3.4 to $4.1 trillion. Campaign proposals by President Trump would have reduced federal revenues by substantially more than the Better Way plan.

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The Better Way plan would dramatically improve the economy. The Tax Foundation estimated the original plan to be almost revenue neutral (down $200 billion) over 10 years because it found that the plan’s dramatically improved tax treatment of investment and substantially lower marginal tax rates would expand the tax base by increasing the Gross Domestic Product (GDP) by 9.1 percent. The Urban Institute-Brookings Tax Policy Center, in contrast, using both its Keynesian and overlapping generation models, determined that the increase in GDP to be no better than one percent.

 

The Tax Policy Center therefore estimates that the plan would reduce federal revenues by at least $2.5 trillion. To this we must add another trillion or so because the BTA has been jettisoned. The Tax Foundation estimates undoubtedly are better grounded in economic reality and give a better picture of what would really happen if something close to the Better Way plan were enacted. The Better Way plan, however, even with strong dynamic growth effects incorporated into the score, will reduce federal revenues by approximately $1.2 trillion without the BTA. 

In the real world, a modified Better Way plan may be close to revenue neutral, but it will not be scored this way. The staff of the Joint Committee on Taxation (JCT) will score tax reform much more like the Urban Institute-Brookings Tax Policy Center than the Tax Foundation. The JCT staff will assume that the economic growth effects of even a well-conceived tax reform bill are quite small. We can therefore expect a tax reform plan similar to the Better Way plan without the BTA to be scored by the JCT as reducing federal revenues by about $3 trillion.

Minus three trillion does not equal zero. Congress cannot enact a plan such as the Better Way plan if the budget resolution it adopts requires revenue neutrality as scored by the JCT. Period. Full stop. So Congress is about to put itself in a box that will make achieving tax reform somewhere between very difficult and impossible. Raising an extra $3 trillion in revenue or cutting spending by that amount will pose almost insurmountable political challenges to tax reform proponents. The solution is simple. Congress should not put itself in the box.

The budget resolution should permit tax reform to reduce revenues by a reasonable amount, about $3 trillion. This is a relatively modest reduction of about seven percent in the roughly $43 trillion of projected federal revenues. In the real world, however, because of tax reform induced economic growth, the reduction in federal revenues would be about $1 trillion, or about two percent. This is a small price to pay for prosperity, internationally competitive businesses and rising wages. Prosperity will also make it easier to constrain federal spending. The economic gains to be had from major tax reform are simply too large to let the JCT score derail it. The budget resolution should also limit the assumed future increases in federal spending. That too can be done. In fact, the Budget Control Act in 2011 reduced spending by $2 trillion over 10 years.

In addition, we do not want tax reform’s marginal tax rate reductions and improvement in the taxation of business investment to be temporary. Such a temporary approach would substantially reduce the economic gains from tax reform. The Senate’s budget reconciliation Byrd Rule requires that the bill not increase the deficit beyond the “budget window.” Otherwise, it would take a supermajority to overcome a filibuster. The law requires that this window be at least five years.

Congress should increase the budget window to 25 years. This simply means that the budget resolution should call out revenue and expenditure figures for 25 years and the changes compared to baseline for the same 25-year period. A 25-year budget window will allow Congress to phase in permanent spending reforms and allow more of the tax changes to remain effectively permanent. (Twenty-five years is as close to permanent as any policy change ever gets in Washington. Twenty-five years ago, George H.W. Bush was president.

We have the best chance in a generation to achieve major pro-growth tax reform. The country cannot afford for this tax reform effort to fail, as the attempts in the 1990s and under the second President Bush. Congress must not create unnecessary procedural hurdles to getting tax reform done for the American people.

David Burton is a senior fellow in economic policy at the Roe Institute for Economic Policy Studies at the Heritage Foundation.


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