“Tax reform” is like moms and apple pie – everyone is for it. That is because it means all things to all people – simplicity, fairness, faster growth, lower unemployment and tax cuts for almost everyone. Legislators love tax reform, too, because it provides so many opportunities for private meetings with tax lobbyists to discuss their concerns, at which campaign checks are usually exchanged. The lobbyists don’t mind because they get to write memos to their corporate bosses bragging about their “inside” access to congressional tax writers.
In other words, it’s something of a game whose only purpose is to keep playing. There is seldom any pressing need to undertake a major reform, as opposed to a targeted tax bill to deal with some squeaky wheel. Such a squeaky wheel is a long list of so-called “extenders” – popular tax incentives that expired at the end of 2013 that almost everyone thinks will be enacted retroactively once the tax lobbyists have been sufficiently soaked of campaign cash for the year.
The main problem with this game is that a few citizens out there don’t know it’s a game. They really believe tax reform is important and necessary and will materially improve their lives. The reality that previous reforms in 1969, 1976 and 1986 had virtually no discernible effect on the economy, living standards, fairness or simplicity has faded from memory, even among tax experts.
I have previously discussed the academic research on the Tax Reform Act of 1986, especially the authoritative article in the June 1997 issue of the Journal of Economic Literature by Alan J. Auerbach of the University of California, Berkeley, and Joel Slemrod of the University of Michigan, which found almost no “real” effects on the economy despite massive changes in tax rates and the tax base. The bulk of the effects they could find simply consisted of superficial accounting and portfolio changes.
This is not to say that tax reform isn’t a good idea from time to time, if only to clear away some accumulated brush that grows in the tax code, do some streamlining, combine duplicative tax provisions, deal with legislative fixes required by court cases, codify regulatory rulings, patch glaring holes and so on.
Unfortunately, Congress is no longer interested in such routine legislating. Especially in the tax area, the issues are so politicized that there is no legislation that can be considered noncontroversial. Every tax bill quickly becomes a train to which a long list of legislative amendments can be attached, which requires an ever more powerful locomotive just to get out of the station.
Given the state of the economy, faster growth is the obvious engine that tax reform supporters hope can provide traction. Hence, more than the usual amount of effort has been put into calculating the precise economic effects of the tax reform draft released last week by Representative Dave Camp, Republican of Michigan and chairman of the House Ways and Means Committee. His news release promises 1.8 million new private-sector jobs and an increase in the gross domestic product of $3.4 trillion.
These results were calculated by Congress’s Joint Committee on Taxation. In a document released with the Camp proposal, it provided details on how it calculated its macroeconomic estimate. It also released a standard revenue projection and distribution tables showing how the reform would affect households at different income levels. The revenue estimate shows that the legislation is roughly revenue-neutral, neither raising or lowering aggregate projected revenues over 10 years.
Since standard revenue estimates are calculated on the assumption that tax changes don’t affect the macroeconomy, any increase in growth potentially means that revenues would in fact be higher. This is just a variation of the old Laffer curve idea Republicans have been pushing since the 1970s – that tax cuts raise revenue. Official acceptance of this idea in the revenue-estimating process would make tax reform easier by creating more winners and fewer losers who might resist the “reforms” that would raise revenue to pay for tax rate cuts.
Although few economists deny the possibility that some very specific tax cuts might temporarily raise revenue, or that a well-designed tax overhaul might raise the trend rate of economic growth somewhat, they are mostly skeptical that such effects are widespread, large or long-lasting. A new study by Congress’s leading authority on “dynamic scoring,” the Congressional Research Service economist Jane G. Gravelle, walks through what is known on this subject based on published research in respected academic journals.
One problem is that the bulk of existing tax research involves movements in one direction: tax increases or tax cuts. But tax reform does both simultaneously. This makes it very difficult to determine which effect will dominate – the depressing effect of losing a tax incentive or the stimulative effects of lowering statutory tax rates. And depending on the nature of the tax reform, one effect may dominate in the short run while the other may dominate in the longer run. The supply side of the economy may react differently than the demand side, and so on.
On top of this, economists must also make assumptions about the path of government spending, deficits and Federal Reserve policy, all of which may overwhelm the tax effects even if they are calculated correctly.
Fortunately, it is not necessary to sort all of this out right away. The consensus view in Washington is that tax reform is a nonstarter now because this is an election year and symbolic votes on repealing the Affordable Care Act take priority over substantive legislating. Moreover, Mr. Camp must give up the Ways and Means chairmanship at the end of the year under House rules and his Senate counterpart, Ron Wyden, Democrat of Oregon, has only just taken over the Senate Finance Committee.
Still, having a fully formed tax reform proposal on the table is a necessary step forward. I hope Mr. Camp will schedule many hearings with top experts who can perhaps arrive at some consensus on which provisions of the legislation are worthy of serious consideration and may have unambiguously positive economic effects – and which may be counterproductive or mere window dressing.
Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul. He is the author of “The Benefit and the Burden: Tax Reform — Why We Need It and What It Will Take.”