Navigating Tax Reform: A Guide to Growth and Fiscal Responsibility 1144

 in Blog  tagged Fiscal Responsibility / tax reform by (updated 225 days ago)

With economic headwinds and a ballooning national debt, Republicans face a critical challenge: crafting tax and spending reforms that stimulate growth while maintaining fiscal discipline. The success of their reconciliation efforts hinges on the careful selection of budgetary offsets. Here are three key principles to guide their decisions:

1. Prioritize Spending Cuts to Safeguard Economic Growth:

The primary offset should be spending reductions, not tax increases. Current projections show federal spending averaging a staggering 23.9 percent of GDP over the next decade, a level unseen since World War II and far exceeding historical tax revenue collection. To achieve a sustainable fiscal path, spending must return to more typical levels, closer to the post-WWII average of 19.8 percent of GDP.

Numerous studies, including those by the Congressional Budget Office, demonstrate that spending cuts are generally less detrimental to economic growth than tax hikes. Reducing transfer payments and social spending has minimal long-term economic impact, whereas taxes that discourage work, saving, and investment create significant economic drag.

While the House budget resolution allows for a $2.8 trillion deficit increase over ten years, it incentivizes spending cuts by requiring them for every dollar of tax cuts exceeding a certain threshold. For example, a $4.5 trillion tax cut necessitates a $1.7 trillion spending reduction. Although these figures are substantial, they represent a relatively small portion of the overall federal budget. However, even these cuts may not be sufficient to prevent debt from reaching record levels.

2. Select Tax Offsets Carefully, Avoiding Economic Harm:

To manage the bill’s cost and adhere to the budget resolution’s tax cut cap, lawmakers may consider tax offsets. However, they must avoid measures that stifle economic activity.

For instance, limits on corporate state and local tax (C-SALT) deductions, while generating revenue, would increase effective corporate tax rates, hindering investment and wage growth. Similarly, expanding limitations on executive compensation deductions (Section 162(m)) would disproportionately burden a select group of workers. Instead, this rule should be repealed.

Rolling back deductions for capital costs, such as research and development (R&D) expenses, would also harm the economy. The shift toward amortizing R&D expenses has already resulted in reduced R&D spending and cash flow problems for small businesses. Lawmakers should instead pursue full expensing for all investments, including R&D.

Furthermore, expanding taxes like the stock buyback tax or the corporate alternative minimum tax, as proposed by the Biden administration, would add unnecessary complexity and hinder economic growth. These taxes should be repealed, not expanded.

3. Target Distortionary Preferences and Subsidies for Tax Offsets:

Tax offsets should align with the goals of tax reform by eliminating distortionary preferences and subsidies. Lawmakers should focus on genuine loopholes and costly subsidies rather than provisions that support economic growth and neutrality.

Examining tax expenditure lists from the Treasury Department and the Joint Committee on Taxation reveals numerous targets. For example, green energy tax credits, a major component of the Inflation Reduction Act, are projected to cost over $700 billion in corporate tax revenue over the next decade.

Other corporate tax subsidies ripe for scrutiny include the credit for low-income housing investments, the exemption of credit union income, the new markets tax credit, and special tax benefits for Blue Cross/Blue Shield.

Significant individual tax subsidies also exist, particularly in healthcare. The exclusion of employer-sponsored health insurance represents a massive distortion, encouraging excessive healthcare consumption and costing trillions. Similarly, Affordable Care Act premium tax credits, health savings accounts, and medical expense deductions contribute to the deficit and distort market behavior.

By adhering to these three guidelines—prioritizing spending cuts, carefully selecting tax offsets that avoid economic harm, and targeting distortionary preferences—lawmakers can craft a tax and spending package that fosters economic growth while ensuring fiscal responsibility.

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