September 1, 2014

Tax Reform, Starting From a Blank Slate

  • The nation's fiscal future depends on the balance between the spending in the federal budget and the revenues flowing into the treasury. Tax policy...

In a letter last week to their Senate colleagues, the chairman and ranking member of the Senate Finance Committee -- Max Baucus (D-Mont.) and Orrin Hatch (R-Utah) -- explained their plans to push for dramatic reform of the tax code.

The letter was noteworthy in that it explicitly embraced the tax reform strategy of the Simpson-Bowles and Domenici-Rivlin deficit-reduction commissions: “zero-based” reform or, as Baucus and Hatch termed it, a “blank slate” plan. It begins with the elimination of all tax expenditures and then adds back those that can be justified by proponents after comparing their costs and benefits.

The senators requested that any colleague interested in adding back a loophole, deduction or exclusion send them a detailed proposal or legislative language and explain how such a proposal meets this test for inclusion in the new tax code: Does it help grow the economy, make the tax code fairer, or effectively promote other important policy objectives?

Starting from a blank slate is the best way to go about tax reform. It puts the burden on supporters of special provisions to justify why the resulting revenue losses are worth everyone paying higher tax rates.

While The Concord Coalition supports this approach and applauds Baucus and Hatch for their bold letter, two key details have not been filled in: the revenue goal and rate structure. Without that information, supporters of special provisions won’t have to explicitly account for their fiscal and economic opportunity costs.

The tax reform discussion is easier politically if the revenue goal and desired rate structure are set aside. However, this puts the cart before the horse. As we have seen in attempts to enact a “grand bargain,” a major impediment to any deal has been the revenue amount and income tax rates. Without agreement on them first, there is no context for further discussion, and the likelihood of tax reform resulting in fiscal sustainability is diminished. Ultimately, taxes and spending cannot be considered in separate silos.