How Republicans Can Make Tax Cuts Permanent
The Trump administration's tax plan includes reforms that are just what we need to jump-start our economy, generate growth and income gains, and fulfill a major campaign promise.
So what are the obstacles to getting some version of the president's tax reform done? First, doing it right will increase budget deficits in the short run, according to government accountants.
Second, the Democrats' lack of interest in the project means Republicans will almost certainly have to use budget rules allowing us to pass tax legislation with just 51 votes in the Senate instead of the usual 60-vote requirement. Those rules impose certain limitations.
But neither of these challenges should prevent us from enacting dramatic, pro-growth tax reform.
For starters, the projections of increasing deficits are very likely to be wrong. As former Senator Phil Gramm pointed out recently, past official scoring of tax legislation failed to fully anticipate the economic gains that follow pro-growth tax reductions. The revenue surge of the Reagan tax cuts, for example, was largely missed. While Congress has begun to update its revenue-estimating procedures, the models used are likely to underestimate the fiscal benefits of the stronger economy that the changes will create.
Even if the scorekeepers are right, our economy is still laboring under the weight of more than $2 trillion in Obama tax increases. Accepting a net tax cut of this magnitude would simply restore us to the pre-Obama levels.
As a share of the economy, federal revenues are higher than their historical average by tens of billions of dollars per year. A Republican Congress and White House should neither entrench the higher tax levels that have contributed to dismal economic results nor sacrifice action to pay for what is clearly a problem caused by entitlement spending.
Finally, if we insist on raising other taxes to close the deficit gap created by the Trump plan, we will undermine the growth incentives we need. In other, recent proposals, this path has led to economically harmful ideas such as extending depreciation schedules; losing research expense deductions; and imposing “bubble” tax rates.
But what about the restrictive budget rules we Republicans will have to use to pass tax reform in the Senate? It is widely reported that those rules, which allow for passage of the measure with 51 votes, rather than 60, forbid tax changes that increase deficits beyond 10 years, so many have suggested tax reform must either be revenue-neutral or expire.
Making major tax reform temporary -- even for 10 years -- undermines its effectiveness since many business projects and decisions depend on forecasting beyond that period.
Fortunately, the conventional reporting on budget rules is incorrect. It confuses recent practice with statutory obligation.
Every year Congress is supposed to pass a budget resolution setting revenue and spending targets for the next several years. This resolution can contain reconciliation instructions allowing budgetary changes to be made with a simple majority.
The governing law, the Budget Act of 1974, forbids a relevant tax bill from increasing the deficit beyond the time frame contemplated in the enabling budget resolution. But it does not limit the duration of that time frame.
Congress has traditionally used a 10-year time frame, but nothing in the law prevents us from using a 20- or even 30-year time frame. A 20- or 30-year tax reform would be as close to permanent as we can get since Congress would be likely to overhaul the tax code within that period anyway.
Americans are rightly fed up with the feeble growth of recent years. Dramatic, pro-growth tax reform will enable us to return to the robust growth that is normal for America, and that creates opportunities, raises our living standards and ensures that our kids have a realistic shot at a better life than their parents.
Congress must seize this rare opportunity. We can’t let a fixation on deficit predictions or arcane budget rules get in the way. We were elected to get this done.
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