New book explains tradeoffs of tax proposals to lawmakers

The Tax Foundation released a book on Monday to help explain to lawmakers the tradeoffs involved in various tax-reform ideas.

The book from the free-market group analyzes 86 commonly proposed changes to the tax code and estimates their effects on revenue, the economy, jobs and the distribution of the tax burden across income groups.

Many members of Congress view 2017 as the year when the tax code will be overhauled for the first time in 30 years.


Tax Foundation president Scott Hodge said many lawmakers don’t have a good understanding of the “mechanics of tax reform” and are surprised about the tradeoffs they have to make.

The group assembled the book to give lawmakers and their advisers an understanding of proposed tax changes “so that when they finally put them together into a comprehensive plan, they’ll have a better sense of how all of these pieces will fit together,” he said.

Also, members of Congress currently write legislation and then get revenue estimates from the Joint Committee on Taxation that they may be surprised about.

“We thought that a book like this would help give them a better understanding of these policy changes before they were drafted in legislation and sent to Joint Tax for scoring,” Hodge said. “And we hope that this improves the process so that the end result is fewer mistakes as they go about putting together comprehensive legislation.”

Hodge said that lawmakers often talk about tax reform as broadening the tax base and lowering rates. But the Tax Foundation has learned that politicians have to be careful about how they go about broadening the base “because you can make mistakes along the way that end up sabotaging the growth that you’re trying to get from the lower tax rates,” he said.

A key takeaway from the book for lawmakers is that “no two tax changes affect the economy the same way, whether it’s tax increases or tax cuts,” Hodge said.


Two proposals that raise or lower the same amount of revenue may grow or shrink the economy by different amounts. For example, taxing capital gains and dividends as ordinary income and removing the Social Security payroll tax cap would reduce revenues by the same amount prior to factoring in economic effects, but raising capital gains taxes has a more detrimental effect on the economy, according to the book.

“Those nuanced differences are really important to understand when you’re putting together comprehensive tax reform,” Hodge said.

The Tax Foundation provided both “static” revenue estimates that do not take economic effects into account as well as “dynamic” estimates that incorporate economic effects.

The proposals that have the biggest economic impacts generally involve changes to the corporate income tax base.

For example, the Tax Foundation estimates that allowing businesses to immediately deduct the full costs of their investments — an idea that has been floated by a number of Republican lawmakers — would increase gross domestic product in the long-run by 5.4 percent.

Changes to the estate tax, which has a high rate and a small base, also have an “outsized impact” on economic growth compared to the amount of revenue raised or lowered, said Kyle Pomerleau, director of federal projects at the Tax Foundation.

Proposals that involve changing tax rates have among the biggest impact on the number of jobs. This is because lowering tax rates will incentivize people to enter the workforce, Hodge said.

Proposals about excise taxes, such as increasing the federal gas tax, can raise a lot of revenue without affecting the economy much because the taxes have a broad base and would not change incentives to invest much, Pomerleau said.

The Tax Foundation is not making recommendations about which proposals lawmakers should enact, and it cautioned that the revenue and economic impacts of separate proposals in the book should not be combined because the proposals would interact with each other.