The “no new taxes” pledge taken by Republicans in Congress has been a huge obstacle to achieving bipartisan agreement on a comprehensive deficit reduction plan. Many Republicans interpret the pledge as ruling out revenue increases of any kind, even those that close narrow loopholes and special interest deductions. The devotion seems to extend to a “grand bargain” for deficit reduction that would actually enact future cuts in tax rates, but pay for some of the revenue loss from those cuts by limiting deductions and loopholes.
However, it is encouraging that some of the newly appointed Republican members of the debt limit deal’s super committee have already indicated a refreshing openness to considering this approach. Congressman Fred Upton (R-MI) recently told a group of constituents that “tax reform is long overdue” and that he is “not afraid of looking at tax loopholes” in finding common ground on deficit reduction. And, Congressman Dave Camp -- a Republican super committee member from Michigan who also chairs the tax-writing House Ways and Means Committee -- when questioned about tax increases has said that “nothing is off” the super committee’s table and that he is “willing to discuss all issues that might help us reduce our short and long-term debt and grow our economy.”
This willingness is important because there are numerous tax cuts scheduled to expire over the next two years and under this current law, deficits will be trillions of dollars lower than if we continued with “business-as-usual” tax policy. In fact, this amount of revenue is enough to make the difference between sustainable and unsustainable deficits over the next couple decades.
What the super committee Republicans might be thinking about is that not all revenue increases are created equal in terms of economic effects. Economists generally believe that increases in marginal tax rates (think: income tax rates) dampen economic activity. However, revenue increases achieved by reducing special preferences in the tax code or “broadening the base” actually reduce the distortions in the tax system and enhance efficiency. Thus, getting rid of these so-called “tax expenditures” raises revenue to reduce the deficit and shrinks the size and scope of government. So, while paring back tax expenditures increases revenue to the treasury, it is more like cutting spending than “raising taxes.”
For a “grand bargain” on deficit reduction, finding a way to bring in some revenue is a crucial piece of the puzzle to lower deficits in the medium term (10 years), because there is only so much spending that can be cut over a ten-year time period -- especially if politicians refuse to reform the large entitlement programs, as they did in the first round of debt reduction (and as will happen if the super committee fails and triggers automatic spending cuts).
So, if Republicans decide that reducing tax expenditures and increasing the efficiency of the tax code is permissible, that paves the way for sustainable deficit reduction.