Diane Lim Rogers, chief economist for The Concord Coalition, told lawmakers today that reducing special provisions in the tax code that favor some taxpayers could simultaneously reduce the deficit, encourage economic growth and promote fairness.
Appearing before the Senate Budget Committee, Rogers urged lawmakers to broaden the tax base by reducing so-called tax expenditures, which she described as “upside down subsidies” for some taxpayers – largely those with higher incomes -- at the expense of others.
Rogers also challenged the idea that deficit-financed tax cuts can pay for themselves, warning that they “are not a free lunch.” Such cuts, she said, have generally reduced national savings and consequently can harm long-term economic growth.
“I’ve recently heard the three tax reform goals in the title of this hearing – encouraging growth, reducing the deficit, and promoting fairness – referred to as a ‘fiscal trilemma,’ suggesting it might not be possible to achieve all three,” Rogers said. “The good news is that it really is possible to find tax policy changes that would do well for all three goals.”
She cautioned, however, that these policy changes would still require difficult choices.
The best way to achieve all three of the tax-reform goals, she said, would be “filling in the holes and dips in the tax base so that different forms of income are treated more evenly and equitably.”
Given the progressive rate structure of the federal income tax system, Rogers noted, the current array of exemptions, deductions and preferential rates benefit high-income individuals the most.
The President’s fiscal commission and various other bipartisan panels have also recommended reducing or eliminating many tax expenditures to streamline the tax code while helping to close the chronic gaps between federal spending and revenue.
On the question of tax cuts, Rogers pointed out that projections from the Congressional Budget Office “show economically unsustainable deficits under a ‘business as usual’ baseline where tax cuts are repeatedly extended and deficit-financed.”
The risk with deficit-financed tax cuts, she said, is that they will reduce the national saving that is needed to support economic growth.
“Our economy cannot grow over time if we are not saving,” Rogers said.
She challenged the consensus among elected officials in Washington that most of the tax cuts originally approved in 2001 and 2003 should be extended and financed with additional federal borrowing. These cuts, she said, have clearly exacerbated the deficit and contributed to income inequality.
Advocates of extending tax cuts have suggested that government revenues of about 18 percent of the Gross Domestic Product (GDP) – the average over the last 40 years – should be sufficient for the future. But Rogers pointed out that demographic trends and rising health care costs are driving the growth in federal spending – and that many advocates of extending tax cuts are reluctant to reduce entitlement spending as well.
She suggested that Congress consider either letting the 2001 and 2003 tax cuts expire as scheduled or at least offsetting the cost of whatever cuts are extended.
Rogers’ prepared testimony can be found at http://www.concordcoalition.org/publications/2012/0301/congressional-testimony-tax-reform-encourage-growth-reduce-deficit-and-promot
A video and additional information on the hearing are available at http://budget.senate.gov/democratic/index.cfm/committeehearings?ContentRecord_id=553aa480-29a4-44b4-8b3f-9fc8004f4e81
The Concord Coalition is a non-partisan, grassroots organization dedicated to fiscal responsibility.