Sen. Orrin Hatch (R-UT) (Newscom)
Chairman of the Senate Finance Committee Max Baucus (D–MT) and Ranking Member Senator Orrin Hatch (R–UT) recently proposed a “blank-slate” approach to tax reform. This new effort helps strengthen the growing momentum for tax reform, but it is too narrow to result in the fundamental reform to the tax code that the economy and the country need right now.
Their plan calls for eliminating all so-called tax expenditures (better referred to as “tax preferences”) and adding back those tax preferences the rest of the committee determines are worthy of continuation.
The list of tax preferences Baucus and Hatch would eliminate, and from which the Senators would choose to add back, is the incomplete list compiled by the Joint Committee on Taxation (JTC). Though it lists many tax preferences, it doesn’t include two of the largest tax preferences in the code: the standard deduction and personal exemptions.
The JCT list also wrongly includes for potential elimination policies that are essential for a neutral tax code, such as those providing retirement savings accounts like 401(k)s and IRAs. It also wrongly includes as tax preferences tax rates on capital gains and dividends that are below income tax rates.
Then, to encourage economic growth, Baucus and Hatch would lower rates to offset the revenue raised by eliminating the tax preferences the committee chooses to abolish. Troublingly, however, they do not specify whether they would lower rates enough to offset all the revenue that would be raised from eliminating certain tax preferences. If the plan raises revenue, then it is not tax reform; it is a tax increase. Tax increases are not pro-growth.
By limiting their approach to just eliminating the incomplete and error-ridden JCT tax expenditures list, the Baucus–Hatch approach at best can achieve only minor improvements to the tax code. And there is a high probability that it would result in flawed tax reform if it eliminates policies that reduce the disincentive the tax code creates for saving and investment.
The Senate Finance Committee should instead seek to define the proper tax base first. That way it would not mistakenly punish saving and investment, and it would better maintain neutrality. Then it should apply a rate to that proper base that raises no more revenue than the historical 18.5 percent of gross domestic product that the tax code traditionally raises.
If they took that broader approach, Baucus and Hatch would greatly improve the chances of implementing tax reform that frees the economy to grow at its potential and significantly reduce the chances of creating a tax reform plan that does more harm than good.
