An Opening for Tax Reform

February 26, 2014

The new Senate Finance Committee Chairman, Ron Wyden, announced "a breakthrough" on tax reform recently when he said that the Congressional Budget Office (CBO) had committed to him to "actually score pro-growth tax reform as generating revenue." Until now, the refusal of Senate Democrats to recognize a revenue dividend coming from a pro-growth tax code has been the biggest stumbling block to comprehensive reform, say Phil Gramm, a former chairman of the Senate Banking Committee and a visiting scholar at the American Enterprise Institute, and Mike Solon, a former policy adviser to Senate Republican Leader Mitch McConnell.

The real driver behind this breakthrough is a series of recent CBO reports showing how slower growth is bleeding the federal government of trillions in revenues.

  • Since the recession began in 2007, CBO's 10-year projections show that $4.9 trillion in revenues have been lost solely due to slower growth.
  • And while the recession was the initial cause, a CBO report released this month says that about half the losses are due to the weak recovery, with $2.3 trillion in projected revenue losses occurring after the White House's announced "summer of recovery" began in 2010.
  • Those losses are accelerating, with $1.4 trillion of lost revenues reported in the most recent CBO downgrade of economic growth.
  • The decline in expected future growth over the next decade is projected to cost the U.S. Treasury more than twice the $617 billion tax increase it hoped to receive from the January 2013 repeal of provisions of the Bush tax cuts.

The only practical way to recapture these revenues is through a faster-growing economy.

The CBO and congressional Joint Committee on Taxation have analyzed the impact of a pro-growth tax reform.

  • In a 2011 macroeconomic analysis of comprehensive tax reform, the Joint Committee projected the impact from lowering tax rates to range from 0 percent to 0.3 percent higher gross domestic product (GDP) in the first five years and 0.6 percent to 1.1 percent higher GDP growth in the second five years after the reductions went into effect.
  • Applying those estimates to the most recent CBO baseline revenue projections suggests a 10-year revenue dividend in the range of $200 billion to $400 billion.

Tax reform that fueled economic growth and federal revenue growth could be a catalyst for other reforms that could bring back the American economy we once knew and took for granted.

Source: Phil Gramm and Mike Solon, "Suddenly, an Opening for Tax Reform," Wall Street Journal, February 24, 2014.

 

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