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:
- The plan includes a one-time transition tax on the roughly $2 trillion of earnings multinational corporations are holding offshore that must be paid within eight years. The one-off transition tax payments generate significant revenue in the first ten years, but no revenue over the long term. Similarly, some accounting changes are designed to raise the bulk of their revenue over the four-year period ending in 2022.
- The plan’s scaling back of certain tax breaks raises more revenue up front than over time. For example, the plan ends “accelerated depreciation,” which allows businesses to deduct the cost of new investments at an accelerated rate. The JCT estimates show that the revenue gains from ending accelerated depreciation peak in 2019 and then dwindle. Treasury economists have found that ending accelerated depreciation saves much less revenue in the second decade than in the first, and less in the third decade than in the second.
- The plan includes changes intended to promote Roth-type retirement accounts. Chairman Camp has touted these changes as raising money to help pay for the plan’s reductions in tax rates. But the retirement-account changes raise money only initially. And they do so by accelerating into the coming decade significant revenue that would otherwise be collected in later decades. As a result, they likely lose revenues in the long run. These changes would lead more filers to pay more tax up front, in return for tax breaks on their savings when they withdraw the savings in retirement. While such changes can raise revenue initially, they add to deficits in later decades as people secure the tax breaks on withdrawals from their accounts.
- The plan cuts the corporate tax rate from 35 percent to 25, but phases in the cut by two percentage points per year from 2015 to 2019. As a result, the JCT score shows that three-quarters of the ten-year cost of the rate cut occurs in the second half of the decade. This means it would cost less in the first decade than in all later decades (when it would be in full effect for all ten years).
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.