The false narrative of revenue-neutral tax reform
In Washington and the media, any discussion of tax reform invariably includes the term “revenue-neutral.” What this means is that in order to be “acceptable” to the establishment, tax reform must be expected to bring in the same amount of revenue the federal government currently takes in.
This sounds simple. Of course, nothing in Washington ever is, and this is as true for tax reform as it is for anything else, for at least two reasons:
First, there are two ways to look at how tax reform impacts expected tax revenues. The first is static analysis, which is how the Congressional Budget Office (CBO) looks at changes to the tax code (also known as the CBO’s “score” of tax reform). Essentially, this form of tax analysis says every dollar cut out of the tax code is a loss to the government. The other form of analysis is dynamic analysis, which looks at how different changes to the tax code change incentives for consumers. The Heritage Foundation is famous for this. Unfortunately, there is little bipartisan agreement on how to “score” tax reform, as the left tends to support the CBO’s method, and the right tends to support Heritage’s format.
The second difficulty facing “revenue-neutral” tax reform is the concept in and of itself. In short, “revenue-neutral” tax reform admits that the federal government is never going to cut the budget enough to bring spending within the Constitution. After all, if spending was limited to that allowed in the Constitution, much of the Defense Department wouldn’t exist. Most (all?) federal social programs wouldn’t exist. Subsidies would be gone. And the federal government would easily be able to lower tax rates.
This latter point came up in a conversation between Southeastern Texas TEA Party Chairman Jeff Sadighi and me a few weeks ago. We were talking about tax reform and spending, and I noted that a 20% flat income tax, with no loopholes, would bring in close to the same revenue as the current code (without accounting for the dynamic impact of the simplicity of the code on the economy if a one-rate tax was implemented). Jeff said that rate was too high, and I agreed… but we also agreed that a tax rate of 20% that went down every couple of years as spending was slashed would be a good way to institute tax reform. After all, the federal government would “need” less of your money every year it continued to run a surplus.
And this is yet another example of the conceit and dishonesty of Washington: rather than cut spending in order to lower tax rates over time, most politicians would rather grow spending and take more of your hard-earned dollars in order to partially compensate for these increased costs of government. Never mind that most of what is spent today is unconstitutional, and that which is constitutional is too often wasted through fraud, improper payments, and duplication.
As Washington discusses tax reform, be sure to note how “revenue-neutral” tax reform is worked into the language of big government politicians and their allies in the media. And know that when they talk about making tax reform “revenue-neutral,” they are also talking about never, ever lowering spending or taxes.