Reid Throws Major Roadblock in Front of Tax Reform

Senate Majority Leader Harry Reid (D–NV) has just thrown a roadblock in front of tax reform that could stall the strong momentum that has been building for reform.

Reid said that any tax reform plan must raise significant revenue. In other words, he wants tax reform to provide cover for yet another gargantuan tax increase. Reid wants tax reform to raise close to the $1 trillion tax hike called for in the Senate budget resolution passed earlier this year.

Reid’s demand for a huge tax increase is a serious setback, because it is contrary to the purpose of tax reform. Tax reform’s central goal is to free the economy to grow stronger by reducing tax rates and eliminating the disincentives to saving and investing that the current tax code imposes. Washington taking more money from the individuals and businesses that earn it through higher taxes would slow growth, which undermines the growth-promoting essence of tax reform.

One of the various constraints that true pro-growth tax reform must adhere to is revenue neutrality. That means that the reformed tax system raises no more revenue than the current system under a traditional static analysis, which does not account for the stronger economic growth that would result from tax reform. Tax reform would undoubtedly help the economy grow faster. A bigger economy means the tax code will raise more revenue as incomes rise. However, higher revenue from stronger growth is not a tax hike.

A tax reform plan that raises revenue on a static basis is a tax hike first and foremost. Senators that want to reform the tax code to revive dormant economic growth should insist that tax reform be revenue-neutral on a static basis. Otherwise, they are contributing to an effort that is primarily about raising taxes.