The Republican members of the Senate Finance Committee recently submitted their recommendations for tax reform to the deficit reduction super committee.
Their recommendations lay out the principles they’d like tax reform to adhere to: economic growth, fairness, simplicity, revenue neutrality, permanence, competitiveness, and savings and investment.
Towards those ends, the Senate Finance Republicans offer several specific policies:
- An income tax rate for individuals and corporations that is no higher than 25 percent;
- Repeal of Obamacare and its tax increases;
- Full repeal of the Alternative Minimum Tax;
- Adoption of a territorial tax system for businesses;
- Small business income subject to only a single level of tax; and
- Macroeconomic feedback effects included in the Joint Committee on Taxation’s revenue estimates of any tax overhaul.
These are laudable policy goals, and true fundamental tax reform would accomplish each if Congress undertook reform in the proper way. That’s where the process of tax reform matters.
The most important reason to fundamentally reform the tax code is to improve the economy. A proper reform of the tax code would first and foremost repair the tax base so it neither encourages nor discourages certain economic activities, such as saving and investing. It would also lower marginal tax rates on individuals and businesses and end up with a tax code that raises the same amount of revenue as the current tax code under traditional Washington budget scoring.
If Congress lays out just a few policy goals it wants to achieve, then reform becomes a game of bartering. Each of the provisions outlined by the Senate Finance Republicans “loses revenue,” according to Congress’s budget scoring rules. To make up for this, other “revenue raisers” would have to take their place. These revenue raisers are likely to be as economically defeating as the policies they replace.
Once Congress starts down this path of give and take, it will quickly lose sight of the end goal of tax reform. The result could be a tax code that is more of a drag on the economy than the current one.
Congress should start with a picture of what it wants the new tax code to look like at the end of the process rather than focusing on a few bad policies that should be ended. If it does that, the specific policies it wants to see scrapped will be kicked out in the process, and the probability that the end result will be worse than the current mess of a tax code would be greatly reduced.