Washington’s Rules Handicap True Tax Reform
Representative Dave Camp was constrained by antiquated budget rules.
By Pat Toomey
The U.S economy is in a world of hurt. Growth is too slow. Two and a half million fewer people will be working by 2024 as a result of Obamacare. Fully 40 percent of Millennials are not working, and about one-third of those young people who do have jobs can find only part-time work.
Fixing our broken tax code is a huge, cost-free opportunity to kick-start economic growth and enable millions of unemployed and underemployed Americans to get back to work. Fortunately, Representative Dave Camp, the chairman of the House tax-writing committee, has proposed a largely pro-growth reform plan. Most important, it would lower marginal rates for individuals and businesses, which is crucial for stimulating job growth. It also would close dozens of loopholes that unfairly favor politically connected groups at the expense of taxpayers generally.
Chairman Camp’s reforms are clearly meant to promote growth. However, there are many provisions that would be detrimental to boosting the economy. The proposal imposes a confusing “bubble rate” and a convoluted surtax on some taxpayers. It lengthens depreciation schedules, diminishing the incentive for businesses, particularly manufacturers, to expand in the U.S. It forces companies that invest in research to deduct their expenses over an extended period of time, possibly jeopardizing America’s role as a technology and innovation leader. It creates a disturbing precedent by imposing an arbitrary penalty tax on a politically unpopular industry. These and other changes would inhibit economic growth, offsetting much of the benefit of the lower 25 percent top marginal rate Chairman Camp proposes.
If the goal of this proposal is to promote pro-growth reform, why does it include these counterproductive components? In large part, because it accedes to the misguided conventions of congressional budgeting.
First, the proposal is based on the flawed premise that tax reform must be revenue-neutral — without accounting for the stronger economy that would result from reforming our tax code in a pro-growth manner. Thus, the revenue said to be lost by lowering tax rates is offset by a variety of discrete tax increases, including those cited above, which inhibit growth. We know that lower tax rates encourage work, attract capital, and spur investment. This dynamic effect is even recognized by Congress’s official scorekeeper of tax policy, the Joint Committee on Taxation. Stronger economic growth means more tax revenue. According to the Congressional Budget Office, for every tenth of a percentage point we raise average GDP growth, revenue increases by more than $300 billion over ten years. Tax reform should be revenue-neutral when dynamically scored, taking into account the growth-induced revenue surge that better tax policy will generate.
The second flawed premise underlying Camp’s plan is that it assumes the revenue level achieved from the “fiscal cliff” tax hike of January 1, 2013, should be maintained. We Republicans believe this tax increase should not have occurred and would not have occurred but for the fact that President Obama insisted on it. The dynamically scored revenue of any tax-reform overhaul should match the projections prior to President Obama’s tax hike, which did little to solve our long-term deficit problems while further distorting our tax code.
Finally, there are dozens of temporary tax breaks — some good, some bad — that are routinely extended at the end of each year. In the parlance of Washington, D.C., these provisions are known as “tax extenders.” Extenders are never made permanent for two reasons. First, by pretending they will expire, Congress can claim the revenue their expiration would generate and disguise the true size of future deficits. Second, the threat of their possible expiration forces the companies that benefit from them to come to Washington each year with campaign contributions in hand to ask for their extension. Unfortunately, Camp’s tax revenue target is based on the implausible assumption that absent his reform, all extenders would expire. This conceptual flaw forces him to find $900 billion in additional revenue, leading to the undesirable provisions described above.
To his credit, Chairman Camp has made a valuable contribution to the ongoing discussion of the details of comprehensive tax reform. The non-partisan Joint Committee on Taxation estimates his plan, even with its drawbacks, will grow the economy and create jobs. However, the guiding principle of tax reform should not be outdated government scoring conventions. The right pro-growth tax-reform proposal should recognize and account for the new revenue it will generate through stronger growth; it should not incorporate the recent, misguided Obama tax increase; and it should not be constrained by the fiction that consistently renewed tax breaks will expire.
We should cast aside the conventional wisdom of the Beltway and make maximizing growth the guiding principle of tax reform. Anything less would be selling short the potential of the world’s greatest economy.
— Pat Toomey is the junior U.S. senator from Pennsylvania.