Congress, dump the budget gimmicks – we need real reform

Congress, dump the budget gimmicks – we need real reform
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Before I get to what I wish for tax reform, let me start with what I fear: unpaid-for tax cuts pretending to be real reform.

With the national debt at near record levels and no need for fiscal stimulus given where we are in the business cycle, there is no economic reason whatsoever for tax cuts that aren’t paid for instead of thoughtful, pro-growth reforms that are. 

Sure, there are plenty of fiscal free-lunch arguments that we should just have tax cuts because paying for them is too hard, but that is the kind of thinking that brought us the massive debt we already have and would lead to deficit-financed cuts that could lead to more harm than good. 

Next is what I would like to see out of tax reform, but probably won’t, this time around at least: a carbon-corporate tax swap. 

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Our high corporate tax rate makes no sense given the globally competitive environment in which we live. We need to bring that rate down as low as possible to help promote competitiveness and growth. (As long as we are dreaming, I’d even eliminate the tax if we had ways to protect against creating huge loopholes where people could incorporate to shield their income.) But the rates that are being floated of below 20 percent are impossible to finance from cutting corporate tax loopholes alone, and even rates in the mid-20s are virtually impossible to achieve. 

 

Growth-enhancing corporate tax reform should be part of revenue neutral (or increasing) and distributional neutral (or, in my opinion, progressive) reforms. Put another way, this is not an effort to shrink the financing of the government or give CEOs tax breaks, but rather to grow the economy and make sure those gains are shared. 

To make up for the lost money, my first choice would be from a carbon tax because of the many external benefits that could provide along with a high revenue stream. As any economic teacher will tell you: tax what you want less of, not what you want more of. A carbon tax in this country is long overdue.

To achieve at the very least distributional neutrality, some of the carbon tax revenues could and should be returned to taxpayers in a progressive manner through rebates to make up for the regressiveness of the tax. And those who benefited the most from lower corporate taxes (some of the benefits go to wage earners but a great deal go to shareholders) should pay more at an individual level. 

Stepping back into the current moment, where there is a real opportunity for tax reform that should not be missed, I hope to see broad-based tax reform that lowers the rates and broadens the base, as we saw in 1986. 

Importantly, the 1986 reforms were revenue neutral and bipartisan, which protected them from becoming the political punching bag that one-sided policies tend to be. The base broadening measure in the reforms — which then were more on the corporate side and this time would be more on the individual side, where 90 percent of the tax breaks are — were not only used to offset the costs of lower rates, they were a useful part of improving the tax code as well. Many of these tax breaks — all told, there are over $1.5 trillion per year — contribute to a massive misallocation of resources in the economy. 

The tax breaks Congress is rumored to be considering, including interest deductibility, the home mortgage interest deduction and the state and local deduction, are all prime candidates for reform. I would love to see policy makers add the health care exclusion, which drives up health care costs, added to that list.

And as the reform plan progresses through the legislative process, I hope our lawmakers will reject the all too common budget gimmicks of paying through sleight of hand. One possible trick to look out for is a moving baseline from current law to current policy. This little maneuver creates a giant half-trillion-dollar hole. And while dynamic estimates make sense in that smart reforms will grow the economy (though they most definitely will not pay for themselves) those estimates should be realistic, not made up to plug a hole.

I desperately hope we succeed at tax reform in the coming months in a way that doesn’t make the debt worse. If done right, it could make a big difference in starting to build a smart economic growth plan for this country.

MacGuineas is the president of the bipartisan Committee for a Responsible Federal Budget.