Featured Articles

Hatch Open to VAT, BAT?

Posted on June 8, 2017 by Dylan F. Moroses Asha Glover

The Senate’s top taxwriter is open to examining the controversial border-adjustable tax included in the House Republican blueprint and even a VAT, saying June 7 that “we have to look at everything right now.”

Sen. Orrin G. Hatch, R-Utah, also said that as Finance Committee chair, he is “not committing to any specific rate targets.” Speaking at an event sponsored by Bloomberg BNA, Hatch called on House Republicans to provide specific details on the border-adjustable tax provision “to find out if it works like its proponents say that it will. Until then, I'm not going to publicly rule anything out.”

Hatch said there are still too many variables to account for and provisions that need details for him to support any specific rate reduction: “Until we perform the surgery and start eliminating preferences and credits in order to bring down rates, and we get official feedback from the Joint Committee on Taxation, we cannot state [anything] definitively on the rate targets, and of course we have to see just where our members are going to object to the removal of certain tax provisions.”

Hatch said one of the main concerns with a VAT system among Republican senators is the ability to increase taxes rather easily compared to the current income tax system.

Hatch also accused Senate Democrats of obstructing progress on tax reform, claiming they are unwilling to support an upcoming debt ceiling increase unless Republicans commit to keeping tax reform legislation revenue-neutral. “An upfront commitment on revenue neutrality shouldn't be in order to start work on tax reform,” Hatch said.

He added that he would prefer a revenue-neutral tax reform package, but would not oppose a bill that “loses revenue in the short term if it helps the economy get on a better path for growth.”

Under reconciliation rules, which Republicans must abide by if they are to pass reform legislation without Democratic votes, that legislation cannot raise or lose revenue outside a 10-year budget window.

Handling Tax Expenditures

The prospect of tax reform was also raised during a June 7 House Budget Committee hearing on economic growth.

During the hearing, committee Democrats and economists on the witness list agreed that beyond a rate cut, tax expenditures need to be addressed within the realm of tax reform.

House Budget Committee ranking minority member John A. Yarmuth, D-Ky., said that tax expenditures also need to be addressed within tax reform. “We now have well over $1 trillion annually in tax expenditures and no Congress over the last six or seven years has been willing to touch any of them. We’ve certainly talked about cuts in many other areas of investment that Democrats care very significantly about, but [there’s been] no talk about reducing tax expenditures.”

Two of the three witnesses on the panel agreed that expenditures need to be addressed within tax reform. Jason Furman, a senior fellow at the Peterson Institute for International Economics, said that Office of Management and Budget Director Mick Mulvaney’s decision not to count economic growth from tax reform was a prudent idea because “then you are cutting rates, eliminating tax expenditures, and if the theory works out that that adds to economic growth, that’s great, we get extra deficit reduction. That’s not a bad mistake to make that the growth comes in more than you think and the deficit goes down even more than you would think, but for that to work you need to go after those tax expenditures, rather than wishful thinking.”

John W. Diamond of Rice University’s Baker Institute for Public Policy agreed that eliminating expenditures is necessary, while acknowledging that there are some exceptions. He said the earned income tax credit would be one expenditure he would be in favor of expanding because “the tax expenditures we should not eliminate are ones that incentivize people to work, such as the EITC, or that incentivize a larger stock of capital to make workers more productive.”

Diamond added that another expenditure, the home-mortgage interest deduction, does not need to be eliminated, but it does need to be reformed because it doesn’t do what it’s supposed to do: encourage low-income Americans to buy housing. “Unfortunately, low-income people don’t itemize their taxes and they have relatively low rates, so really all it does is encourage high-income people to overconsume housing. So, if we went to a system that actually encouraged low-income people to be able to afford houses, I would support that.”

Republicans called for overall tax reform during the hearing, with Chairman Diane Black, R-Tenn., saying in her opening statement that tax reform — along with healthcare reform, regulatory reform, and deficit reduction — will help to “provide the economic freedom and the certainty that our economy needs to grow, create jobs,” and create other opportunities.

Douglas J. Holtz-Eakin, president of the American Action Forum, agreed, saying that the current tax system has reached “the ultimate trifecta of bad outcomes. It doesn’t raise that much revenue, it increasingly drives production and headquarters overseas, and it’s incredibly costly and difficult to comply [with] and administer.” Reforming business taxes would help grow the economy, he said, touting House Republicans’ tax reform blueprint as the ideal way to stimulate economic growth, which if executed correctly, would constitute “a comprehensive corporation plus passthrough business reform of business taxation in the United States.” He explained that this would move us “from a tax system that prefers foreign production to a tax system that’s neutral and that’s a shift towards production in the United States.”

Follow Dylan Moroses (@DMoroses3244) and Asha Glover (@AshaSGlover) on Twitter for real-time updates.