Don’t Fall for Tax Reform Trap, Leading Senator Warns

Senator Chuck Schumer (D-NY) issued a timely reminder yesterday on “the trap of tax reform,” warning policymakers to “beware tax reform plans that only get specific about what top rate they want to lock in” and don’t specify what cuts they’d make in tax breaks like those for mortgage interest and retirement savings to offset the cost.

We stressed this point in our June analysis, “How Tax Reform Could Become a Trap,” which explains that locking in a much lower top rate is both extremely expensive and regressive and could easily increase the size of the long-term budget hole that policymakers need to fill.

Starting tax reform by locking in a lower top rate also shifts the focus from what should be tax reform’s real priority — reducing deficits — to trying to pay for new tax cuts for the nation’s highest-income households.  Cutting popular tax deductions won’t be easy, and any such savings need to go to reducing deficits, not financing high-end tax cuts that set the top tax rate even below the Bush levels.

As our analysis concluded:

Policymakers can avoid [the tax reform] trap, and make tax reform an important positive force, by setting as the most important tax-reform goal the raising of substantial new revenue for deficit reduction and doing so in ways that maintain or improve the tax code’s progressivity.  To pursue that path, policymakers should let the Bush tax cuts for households making over $250,000 expire on schedule, generating nearly $1 trillion for deficit reduction over ten years, and seek agreement on how much additional revenue to provide — alongside significant spending cuts — as part of a balanced deficit-reduction package.

The revenue target should be the only numerical target they set up front.  How low the rates are set should depend on how much policymakers will curb real tax expenditures, not be pre-ordained before they start making hard choices on tax expenditures.  Policymakers should cut rates only if they can generate enough revenue from cutting tax preferences to meet their revenue target without gimmicks and in ways that will endure.