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Tax Reform Offers Opportunity to Tackle Deficit, Panelists Say

Posted on June 30, 2017 by Jonathan Curry

Whether it’s improving the tax system, facilitating economic growth, or raising revenue, panelists at a June 29 event in Washington discussed how tax reform gives lawmakers the opportunity to address fiscal concerns — or potentially exacerbate them.

Restraining entitlement spending is a key part of getting the United States back on a fiscally responsible path, but “you can’t cut your way to getting out of this problem,” Mark Weinberger, CEO of EY, said at a discussion in Washington hosted by the Concord Coalition.

The Tax Reform Act of 1986 gave the United States one of the most competitive corporate tax rates in the world at the time. “We were a tax haven,” Weinberger said. But in the ensuing decades, other countries reduced their corporate rates while the U.S. corporate tax rate remained largely the same, and now the U.S. has one of the highest rates and a worldwide tax system. “Bottom line is, this has real consequences. It is driving U.S. business, capital, and jobs overseas,” he said. Corporate inversions to places like Ireland have nothing to do with CEOs being unpatriotic, Weinberger said; rather, “it’s a last-ditch effort to try to stay competitive.”

As evidence of tax reform’s economy-boosting effects, Weinberger cited a recent survey the Business Roundtable did of its members, in which 86 percent of respondents said they would invest in new capital equipment and 72 percent would hire more employees if they got a more effective corporate tax system in 2017. In contrast, 90 percent said they would cut back on both of those if tax reform doesn’t happen.

Jason Furman, former chair of the Council of Economic Advisers under President Obama, agreed that the high U.S. statutory corporate tax rate is a drag on the economy, even if the average effective corporate tax rate places the U.S. in the middle of the pack of developed countries. The lower effective rate “isn’t an argument for not acting, but it is an argument that we can collect taxes in a much less stupid way than we’re collecting them today,” he said.

He added, however, that “we can solve that statutory rate problem without exacerbating another problem we have, which is the budget deficit . . . [by] enacting tax reform on a revenue-neutral basis.”

Many of today’s fiscal concerns are the result of changing demographics, like the aging baby boomer population placing a strain on federal retirement and healthcare spending, and revenue policy is the best way to address that, according to Diane Lim, an economist with the Conference Board Inc.

When done right, tax reform can create economic growth and help reduce the national debt and deficit, but deficit-increasing tax cuts — an idea being floated by the White House and some Republican lawmakers — are not the way to do it, Lim said. Lawmakers can say they’ll sunset those tax cuts, but “once you put a tax cut in place, you cannot take it away, even if it’s something that should have expired,” she said.

Lim disputed that tax reform would stimulate business growth as much as they say. “If you ask anyone, an ordinary person or business, 'would you do more or less if taxes are . . . lower,' they’ll of course say [more], because there’s no cost for them to saying that,” Lim said. Most individuals don’t even know what their current marginal tax rate is, and thus are unlikely to respond to tax rate changes, she said. And although businesses “are more savvy” about their tax rates, tax policy matters less to them than other issues, like regulation.

Maya MacGuineas, president of the Committee for a Responsible Federal Budget, lamented that fiscal responsibility in Washington has turned into “political defense.”

“As soon as your party doesn’t have power, you have politicians who suddenly are very fiscally responsible in order to stop somebody else’s agenda; but it is a lot harder when you’re talking about the things you want to do,” MacGuineas said. Presidential leadership is necessary to make the difficult and sometimes unpopular decisions needed to address the deficit, but “today we have a president who says he wants massive tax cuts, to increase defense spending, and has walled off the most important parts of the budget that are necessary to fix this, which are Social Security and Medicare,” she added.

“That is presidential leadership in the wrong direction,” MacGuineas said.

MacGuineas predicted that lawmakers have “missed the window” to achieve a responsible fiscal deal, and “that is going to hurt the economy.” She said the result will be that Republicans will be left with higher revenue levels than they would have liked because they’ll ultimately have to raise taxes to cover entitlement benefits. And Democrats will be disappointed because even though revenue levels will increase, it will “go to the wrong people,” she said.

“I really feel like both sides have lost,” MacGuineas said.

Furman echoed that point, saying that even though policymakers frequently focus on the short-term results of a particular proposal, their policy decisions have long-term ramifications. “What might look like a tax cut today would really be a tax shift to the future. What might look like a benefit today is a benefit that will somehow have to be paid for in the future,” he said.

Refereeing Congress

The Congressional Budget Office’s recent estimates of GOP healthcare reform legislation have created political headaches for Republicans and sparked questions about the CBO’s ability to estimate healthcare changes, but the controversy shouldn’t undermine the CBO’s credibility as the government scorekeeper, the panelists said.

Forecasting healthcare changes is difficult because of the pace at which technology and preferences change in the medical sector, Stuart M. Butler of the Brookings Institution said. The CBO is also increasingly being required to make political judgments about what it thinks is going to happen — such as how states will respond to changes in Medicaid — which poses additional challenges.

Robert Bixby, executive director of the Concord Coalition, agreed that the CBO’s credibility “as an independent source of federal budget estimates is really, really important.” While the CBO’s estimates may not be perfect, its projections are still valuable for providing the baseline to measure policy changes against, he said, adding, “There has to be an umpire, and CBO is it.”

Bixby agreed that the CBO’s role as the umpire in Congress should not be in dispute, and that the office should have a strong voice in any policy debate. But he also said that it shouldn’t be given “a veto in terms of what politically can be done.”

“As we know, umpires are not infallible,” he said.

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