Tax Reform Reality Check

Congressional Republicans reportedly plan to use the need later this year for the President and Congress to raise the federal debt limit — and the prospect of default if policymakers fail to do so — to force action on an aggressive approach to tax reform.  How they would square their desire for revenue-neutral tax reform with the proposals they’ve offered and the statements they’ve made remains a very open question.

The only tax reform plan that congressional Republicans have produced to date, in the House-passed Ryan budget, would shrink the vast collection of tax credits, deductions, and other preferences, known as “tax expenditures,” to pay for cutting the top rate to as low as 25 percent.  Overall revenues wouldn’t change.

As Jonathan Chait notes, it’s astonishing that Republicans, who in 2011 refused to raise the debt limit until the President agreed to reduce deficits, are now considering using the same leverage to prevent a reduction in the deficit through tax reform that raises revenue.  Moreover, as a recent Politico article highlighted, Republicans still haven’t offered any actual tax expenditure changes to pay for their desired tax cuts.

The Urban-Brookings Tax Policy Center estimated that the Ryan plan’s specified tax-cut goals would dig a ten-year revenue hole of $5.7 trillion, while disproportionately benefiting the highest-income households.  The Ryan plan gives no specifics on how to pay for even one dollar of this amount.

To provide some perspective, the President’s proposal to cap the value of the largest individual tax expenditures at 28 percent would raise $529 billion over ten years.  So the GOP would need to cut tax expenditures by ten times as much as the Obama proposal just to tread water in the nation’s pool of debt.

The Politico story describes a recent House hearing on the mortgage interest deduction, which economists from across the political spectrum recognize is ripe for reform.  The deduction is, however, rather popular, and “top Republicans on the House Ways and Means Committee made clear . . . that they plan to proceed with caution when it comes to deciding [its] fate,” the story reported.

Let’s face it, proceeding with caution won’t raise $5.7 trillion.

Cutting popular tax expenditures is extremely difficult.  Policymakers should pursue modest and politically realistic reforms in tax expenditures and dedicate the savings to long-term deficit reduction.

Obama’s 28 percent cap is not only modest but also equitable.  It’s politically realistic, as well:  during last year’s “fiscal cliff” negotiations, House Speaker John Boehner called for raising $800 billion in revenues through tax expenditure reform, and his staff suggested a type of 28 percent limit on certain tax expenditures as one possible way to do so.  This year, policymakers should enact the proposal into law.