Tax reform could breathe life into the economy -- if the recovery doesn’t kill tax reform first.
A strengthening rebound in the U.S. would accelerate gains in employment and government tax collections, taking pressure off Congress to use tax reform to generate more revenue for deficit reduction, Bloomberg BNA reported. At the same time, backers of a tax-code rewrite have seized on its potential to speed the recovery, and an early economic rejuvenation may undermine their case.
“A grim economy and large deficits pushes lawmakers toward tax reform, because the need is obvious,” said Alex Brill, a research fellow at the American Enterprise Institute, a non-profit group that advocates free markets. “But, in that situation there is added pressure for more revenue and that also makes things more difficult. If the economy improves and the near-term deficit outlook improves as well, then the reverse is true: less pressure on raising taxes but less obvious need to act at all.”
The link between the nation’s economic health and taxes underlies the debate on revamping the code. Conditions in the months ahead will determine not only the parameters but the very prospects for overhaul, which the chairmen of House and Senate tax-writing committees have vowed to pursue this year, lobbyists, lawmakers and economists told BNA.
Already, the economy is showing signs of generating more tax revenue, even if the recovery is sluggish. Government tax receipts have climbed 14 percent above the level a year ago and are greater than initially predicted, Brill said.
This month, the Obama administration projected that the federal budget deficit would drop to its lowest level in five years, $759 billion, for the fiscal year ending Sept. 30 as the economy strengthens and tax collections increase. That would put the deficit at 4.7 percent of gross domestic product.
Historically, deficits have averaged 3 percent -- a level the Congressional Budget Office has predicted for 2016 -- Don Longano, principal of the legislative and regulatory services practice at PricewaterhouseCoopers, said in a July 11 webcast on tax reform, sponsored by the firm.
“Things seem to be slipping into gear,” said Longano, who added that the improving economy “takes a little pressure off revenues” for tax reform.
Economists credit economic growth, as well as additional revenue through the tax increase that Congress passed in January as part of the deal to avoid the so-called fiscal cliff. The CBO estimated in May that federal tax receipts would climb to $2.81 trillion in 2013 from $2.45 trillion in 2012, and to $3.78 trillion by 2017.
While the economy is growing, it’s at a relatively sluggish pace. Gross domestic product grew at a 1.8 percent annualized rate from January through March, down from a prior reading of 2.4 percent, the Commerce Department reported last month, as an increase in the U.S. payroll tax took a bigger bite out of consumer spending than previously calculated.
Representative Charles Boustany, a Louisiana Republican and member of the House Ways and Means Committee, said he’s still not convinced the economy has picked up enough steam to change the debate, especially given the GDP numbers.
Boustany and other senior Republicans on the committee are pushing the idea that the key economic discussion is the effect of revenue-neutral tax reform, which they say will boost growth by lowering top tax rates to perhaps 25 percent on the corporate and individual sides.
“We’re still concerned about the economy,” he said in an interview. “We don’t think we’re out of the woods yet.”
The jobless rate has fallen to 7.6 percent, while payrolls have increased an average of 201,830 jobs per month over the past six months. U.S. employers expanded payrolls by 195,000 in June for a second straight month, the Labor Department said July 5, capping 12 months of advances above 100,000 for the longest such streak since May 2000.
Other economic indicators are improving as well. Corporate manufacturing surveys released July 15-18 by two Federal Reserve district banks were broadly positive, and the Federal Reserve on July 8 reported higher-than-expected spending by consumers.
William McBride, chief economist at the Tax Foundation, said that if the economic recovery quickens, that might push aside the call for revenue from tax reform.
“I think it does make an agreement on tax reform more likely, because it takes away the argument on revenue neutrality,” said McBride, who added that he doesn’t expect a strong U.S. recovery for at least two years.
Every increase in gross domestic product of 0.1 percent generates about $300 billion in tax revenue over a decade, the CBO reported in January 2012.
Even if GDP were to increase by 0.2 percent, the $600 billion in additional revenue over a decade hardly has a big impact on the tax reform debate, according to Donald Marron, director of economic initiatives at the nonpartisan Tax Policy Center.
Marron said he has not seen any numbers from the CBO or the Obama administration suggesting a recovery strong enough to generate the amount of revenue necessary to affect the debate on revenue-neutral tax reform.
While an improving economy in the months ahead could help generate revenue and perhaps save some tax deductions, the outlines of the debate aren’t likely to change, said Representative Bill Pascrell Jr., a New Jersey Democrat on the House Ways and Means Committee.
“You’re not going to see an absolute turnaround on any the issues,” Pascrell said in an interview. “It’ll simply mean that you will not have to do away with a deduction all the way.”