How Republicans Should Approach Revenue Neutrality for Real Tax Reform

Revenue Neutrality in Reality

Feb 23, 2017 | By Ryan Alexander | 4 min read | Print Article

Originally published on October 27, 2017 in U.S. News & World Report

Lawmakers will only worsen our budget problems by simply cutting taxes and calling it reform.

Ever since the last major overhaul of the tax code in 1986, politicians across the political spectrum have sung the praises of reform

that is revenue neutral. Revenue-neutral reform means there would be changes in rates and policies, but the amount of revenue raised by the overall tax system would remain the same. Some left-leaning think tanks and politicians insist that our more-than-a-decade-long spree of deficit spending, despite the efforts to restrain spending through the Budget Control Act and its successor agreements, suggests that we need more money rather than the same amount. But revenue neutrality has remained a core principle for the Republican Party.

How does one achieve revenue neutrality? There are two ways, both of which bring political pitfalls. The first is perhaps the most obvious: lowering rates while also eliminating or curbing tax expenditures (i.e. exclusions, credits, exemptions). This “base broadening,” the argument goes, would offset the cost of lower rates. In the abstract, this sounds good. But it turns out many of the people and companies whose taxes would go up under a new system, like oil and gas companies, tend to be well represented by lobbyists protecting those loopholes. To be sure, many tax expenditures should be eliminated. If Congress wants to subsidize an industry or an activity, it should allocate the money through the annual budget process, not create a special, permanent tax status – this is why the tax code is such a mess.

The other way to achieve revenue neutrality would be to craft tax policy that lowers rates for most taxpayers, but also stimulates economic growth to increase revenues across the board. Sounds great too, right? The problem here is that it’s tricky to demonstrate with any certainty which policies actually do that. Lower rates alone do not automatically generate more economic growth. Even the director to the Congressional Budget Office who was appointed by GOP lawmakers for his use of “dynamic scoring” doesn’t believe tax cuts pay for themselves.

For my organization, Taxpayers for Common Sense, tax reform should not put us on a path to even more deficits and debt. Simply cutting taxes and hoping it will generate enough growth to offset trillions of dollars in reduced revenue is fiscally irresponsible. Congress should fix the problems in the current tax code that hurt economic growth and make the system unfair, without exacerbating the problems with the federal budget. In other words, Congress should set out to improve the performance of the tax code, not just reduce rates.

So, how important is revenue neutrality? It all goes back to one of the basic functions of taxes: to pay for the government we can agree, through Congress, that we want. Just as it is important for Congress to be clear about how it will pay for new spending, or who might be affected by spending cuts, it is important that Congress be honest about the consequences of abandoning the idea of revenue neutrality. Congress seems inclined to do the easy work of lowering tax rates without doing the hard work of finding new revenue to keep it from sending us deeper into the red. Never mind the obvious problems with the tax code Congress is supposedly going to fix. Just cutting taxes and calling it reform is only going to make our budgetary problems worse and do nothing to actually reform the tax code.