Don’t Let The Revenue-Neutral Mongers Block Tax Cuts

We can’t have tax cuts, cry the economic naysayers, because they will explode the deficit, raise interest rates, crowd out private investment, and increase unemployment.  (Funny that these concerns never warrant reducing spending, or even stop spending increases, on politically popular infrastructure, defense, entitlements, and most other federal government programs.)

But these same naysayers tell us that we will have low interest rates as far as the eye can see (or farther, as in the 30-year T-bond rate).

In the past 15 years, the federal government‘s public debt has quadrupled from $5 trillion to $20 trillion.  But none of the alleged adverse effects of sharply rising public debt have materialized.   Indeed, the unemployment rate has fallen from 10% in late 2009 to 4.3% in May 2017, while the 30-year Treasury bond rate has declined from 5.28% in June-July 2007 to 2.8% in early July 2017.  Hmmmm!

Maybe the naysayers’ fears will materialize sometime in the not-too-distant future, but that future does not seem to be around the corner.  The above data suggest that we can have a trillion or more dollars in cuts in marginal tax rates on business and individuals in an attempt to spark growth from a paltry 2% or less over the past 10 years to a more robust 3%.  And, we will be able to sleep at night without having to worry about inflation and unemployment rearing their ugly heads.

Revenue-Neutral Tax Reform Is A Bad Joke On The American Taxpayer

On June 2, 2017, the Bureau of Labor Statistics released the May 2017 jobs report.  Against estimates of 175,000 net new jobs, it reported only 138,000. If economic forecasters are so far off on one month, how can the Congressional Budget Office produce a ten-year (120 months) forecast of revenue and expenditure that is even remotely accurate?

Answer?  It can’t.

The ten-year rule (Byrd Rule) of revenue neutrality that follows a reduction in tax rates, which determines if tax cuts expire or continue after ten years, is arbitrary.   There is no scientific way to project that revenue and expenditure will balance over one year, much less ten.  Let’s be honest about this.

Revenue-neutrality is a game Members of Congress play to pretend they are serious about not allowing tax cuts to increase public debt.  But they are rarely serious about balancing the federal budget under any circumstances. 

Congress enabled the Bush and Obama administrations to pile up $15 trillion in public debt.  Indeed, Congress has presided over a deficit-free (actually surplus) budget only 4 times since 1970. To sacrifice tax cuts on the altar of revenue neutrality, and the possibility of pushing growth up from 2%, where it has been stuck since the Great Recession of 2008, to 3%, is a case of crocodile tears

By definition, revenue neutral means no net tax cut.  In principle, broadening the tax base would permit lower tax rates with no loss in revenue, but good luck with that.  Republicans in blue states vigorously oppose eliminating the deduction for state and local taxes ($1.3 trillion in less revenue to the Treasury over 10 years), and almost no one wants to eliminate the health insurance exclusion.

In 1993, at the age of 23, Paul Ryan began working for Jack Kemp as a speechwriter and for two years at his research organization Empower America.  Ryan first entered Congress in 1999, four years later.  As Speaker, he seems to have forgotten everything Kemp taught him about tax cuts. 

Kevin Brady, for his part, is enjoying his position of power as Chairman of the House Ways and Means Committee too much to give up his love of the Border Adjusted Tax.  He projects it would collect $1 trillion in taxes over ten years facilitating revenue-neutral tax reform.

Et tu, Greg Mankiw?   (NYT, op-ed, June 3, 2017)  For Bush, tax cuts were OK but not for Trump.

Members of Congress keep searching for the Holy Grail of revenue-neutral tax cuts/tax reform, but your friendly proprietor really doubts they want to find it.  Gary Cohn, chairman of the National Economic Council in the White House, cannot answer with a straight face if he would accept a cut in the corporate tax rate if that were the only measure Congress would approve.  No, he has to maintain the fiction of comprehensive tax reform to claim that any cut in tax rates will not increase the public debt or expire over the next ten years.