Tax Analysts Blog

Let's Stop with the Revenue Neutrality

Posted on Apr 24, 2013

For decades, most people have believed that the success of tax reform is dependent on the reform being revenue neutral. That is, whatever happens, the tax system has to raise approximately as much revenue after as it did before. Proponents of reform want to seem pure in thought. They profess to care only about the principles of sound taxation. They use lofty terms like efficiency and equity. They are not hacks pursuing some political agenda on behalf of special interests. As the editor of Tax Notes, Jeremy Scott, once noted everyone uses tax reform as a euphemism for other proposals (conservatives to cut taxes, liberals to raise them). But even the most hardened partisans still couch their proposals in terms of revenue neutrality (at least in the short run).

Revenue neutrality is, of course, a political construct that has been at the heart of every tax reform proposal at every level of government in modern times. And, it is the reason tax reform never happens. Tax reform is messy. It results in big winners and losers. The losers don’t like to, well, lose, so they fight like heck. But trying to make significant changes to the tax laws under the guise of retaining the same levels of revenue is ridiculous. You can pursue efficiency, fairness, or pro growth tax reform that increases or decreases revenue.

Why not be honest? If in fact the proponents of reform all have unstated objectives, why not lay them out on the table? In Louisiana, Governor Bobby Jindal courageously proposed a dramatic change in the tax system. He wanted to eliminate the personal and corporate income taxes. That was his real goal because he believes eliminating those taxes would spur economic growth. But to make the proposal politically palatable he had to make it revenue neutral. He proposed higher sales tax rates and a much broader sales tax base. But broadening the base to include professional services doomed the idea from the start. And as my colleague Cara Griffith pointed out, broadening the sales tax base to include more business purchases was not only bad tax policy, it doomed the proposal. If a GOP governor can’t get the business community behind a tax reform proposal, it has no chance.

There have been similar tax reform proposals, albeit less dramatic, in a half dozen other states. They all strive for neutrality. Our chief economist, Marty Sullivan, showed on this site the difficulty of moving toward less reliance on income taxes and more reliance on consumption taxes. In Sullivan’s analysis, most states would need exceedingly high sales tax rates to make it work. But calls for higher sales taxes engender legitimate complaints from retailers and, just as importantly, those concerned about regressivity.

Perhaps conservatives and liberals should be more honest at the outset. Conservatives should say the tax system is screwed up and needs to be fixed. But in doing so, we are going to reduce overall tax burdens, yes raise less revenue, and have a smaller government. Liberals should be just as up front. They can honestly say the system is screwed up. We are going to fix it in line with traditional thinking on good tax policy. But we are also going to raise overall tax burdens, collect more revenue, and pay for more government services. This may not increase the chances of meaningful reform. But would be more transparent and eliminate the need for pretending that revenue neutrality is important.

Read Comments (1)

amt buffApr 24, 2013

Neither side will get anywhere until they settle the argument about how much
government we can afford. That won't happen until the government bond market
buyers slap us all upside the head by going on strike.

That's why tax reform debate is not only politically motivated, but pointless
as well.

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