by Mitch Kokai
Senior Political Analyst, John Locke Foundation
The headline of Joseph Lawler‘s Washington Examiner article ought to make you cringe: “Can tax reform pay for itself?” To ask that question is to buy into a false proposition: that tax reform should “pay for itself.”
Successful tax reform is valuable for its positive impact on economic growth and its ability to reverse government distortions of free-market transactions. To suggest that it must “pay for itself” is to assume that the amount of money flowing into government coffers is more important than correcting tax code inequities that stifle growth and skew people’s economic decisions.
Still, Lawler’s piece highlights an interesting discussion about the potential impact of the Rubio-Lee tax reform plan.
The proposal announced this month by the two conservatives is an ambitious effort to overhaul the outdated and labyrinthine tax code in a way favorable both to business and families.
They would slash individual and corporate tax rates, and ramp up a tax credit for children. In an effort to stimulate commerce, the senators would zero out taxes on capital gains and dividends while allowing businesses to immediately deduct investments.
To pay for those radical reductions in tax rates, the Rubio-Lee proposal would eliminate almost all the tax breaks in the code.
Doing so would raise revenue, but early assessments of the plan by outside experts suggest that it would not raise enough taxes to offset, on paper, the the tax cuts included in the plan. That’s where dynamic scoring comes into play.
When Congress needs an estimate of how much federal revenue a tax bill will lose, it turns to the Joint Committee on Taxation. Normally, the committee produces a “static analysis” estimate using the assumption that the bill will not affect economic growth.
Dynamic scoring, instead, includes the possibility that lowering taxes or removing distortions in the tax code could boost economic growth, leading to higher tax revenue as well as higher incomes for businesses and workers. It has long been favored by Republicans, who see tax cuts as the key to economic growth.
Past estimates of measures similar to the Rubio-Lee proposal suggest that it could lose the Treasury anywhere from $2 trillion to $4 trillion or even more. The question is how much of that would be made up in a dynamic analysis.