Director of Federal Fiscal Policy
House Ways and Means Chairman David Camp is touting Joint Committee on Taxation (JCT) estimates showing that his new tax reform plan is revenue neutral over ten years and would boost economic growth. But, the Camp plan uses timing shifts, phase-ins of tax-rate cuts, and other maneuvers to achieve revenue neutrality in the initial decade. It quite likely would lose revenue in later decades. And if deficits swelled significantly, its economic effect wouldn’t necessarily continue to be positive in later decades and might even be negative.
On revenue neutrality, the plan uses revenue-raising provisions whose savings taper off or disappear after the first decade, and it includes a major tax cut whose full costs don’t appear in the first decade. For example:
To be sure, the plan includes some provisions that raise more revenues in future decades than in the budget window. For example, the plan adopts the “chained CPI” to index tax brackets and other parts of the tax code, and it phases in some revenue-raising provisions over time.
But the number and magnitude of provisions that tilt in the other direction make it difficult to believe that the plan would not lose revenues over subsequent decades.
As for economic growth, Chairman Camp points to JCT’s estimate that his plan would boost growth. But the JCT analysis covers only the first decade, when the plan is revenue neutral. Other studies from JCT and the Congressional Budget Office have shown that policies that raise deficits can create a drag on economic growth. So if the Camp plan swells deficits and debt in subsequent decades, as appears likely, its economic effects in those later decades are highly uncertain and could be negative.
Every bipartisan panel that has examined the nation’s long-term fiscal problems has concluded that addressing them will require savings from both revenue and spending. That’s why revenue neutrality is not an appropriate goal for tax reform. Yet the Camp plan, which couples temporary revenue gains with permanent rate cuts, likely fails even this inadequate test over the long run.