Four questions are particularly important in evaluating the tax reform proposal that House Ways and Means Committee Chairman Dave Camp (R-MI) is expected to issue tomorrow.
1. Does it raise needed revenue?
All tax reform plans raise revenue by scaling back tax expenditures (deductions, exemptions, and other preferences). A key litmus test for the Camp plan is whether it uses any of the savings to reduce deficits instead of just to reduce tax rates.
The nation’s long-term fiscal problems will require savings from both revenue and spending. Tax-expenditure reform is the greatest — perhaps the only — potential source of revenue savings. If tax reform uses them entirely for tax-rate cuts, it likely will take off the table any meaningful revenue contribution to deficit reduction for the foreseeable future.
Another legitimate use of revenues is to help finance areas important for future economic growth, such as education, infrastructure, and basic research. Key investments are being shortchanged by sequestration. To ensure that the nation can invest adequately in its future, some revenue (along with savings in mandatory programs) will be needed, likely as part of a new budget deal to ease or eliminate sequestration. If tax reform makes that virtually impossible by using up all politically viable tax-expenditure savings without producing any new revenue, the nation will be ill-served.
- For more, see The Problem With Deficit-Neutral Tax Reform.
2. Does it meet its own likely test of revenue neutrality beyond the ten-year budget window?
By all accounts, the Camp plan will strive to be revenue neutral. An essential question is whether it meets that test not just over the first ten years but also over subsequent decades. A package that uses temporary revenue gains to “pay for” permanent rate cuts would be fiscally irresponsible, regardless of whether it is revenue neutral for the first decade.
For example, the plan could rely on timing shifts that push revenue that would ordinarily come in later decades into the coming decade — or on measures whose revenue gains taper off after the first decade — so that the Joint Committee on Taxation scores it as revenue neutral for ten years, even if it would lose revenue and swell deficits and debt in later decades.
3. Does it mitigate income inequality, or at least not exacerbate it?
With income inequality historically high, an important question is whether the Camp plan leans against rising inequality by making the tax code more progressive — or, at a minimum, maintains the tax code’s progressivity.
One issue that will help answer this question is whether the plan makes permanent the recent improvements in two key tax credits for low- and moderate-income workers, the Child Tax Credit and Earned Income Tax Credit (EITC). A related question is whether the plan strengthens the EITC for low-income workers not raising children — the sole group of workers that the federal tax system taxes into, or deeper into, poverty.
Also important are the plan’s effects on progressivity beyond the first ten years. A plan that couples permanent rate cuts with temporary revenue increases could maintain the tax code’s progressivity in the first ten years but worsen it after that.
4. Does it both ask corporations to contribute to deficit reduction and reduce the tax code’s tilt in favor of overseas investment?
Given the cuts that policymakers are making or considering in virtually every spending category — from domestic discretionary spending to Medicare to defense —- corporate tax reform should also contribute to long-term deficit reduction by raising corporate revenues. A related test is whether the Camp plan reduces the tax code’s tilt in favor of overseas profit-shifting and investment, which would risk reducing wages at home.
- For more, see The Fiscal and Economic Risks of Territorial Taxation.