Camp Makes More Fiscally Responsible Choices

In a letter to the Ways & Means Committee, CRFB President Maya MacGuineas states that Chairman Dave Camp's tax reform draft made the right choices in choosing how to deal with the tax extenders and potential revenue from economic growth. The full letter can be seen here.

In response to Chairman's request for comments on his tax reform draft, the letter commends Camp for taking the responsible approach towards two issues. First, Chairman Camp asked if it was correct in scoring the legislation against a current law baseline which assumes the expensive package of tax extenders will expire as scheduled, or whether the draft should alternatively assume that the provisions are extended without being paid for, as Congress has often done. Second, the draft asked about the treatment of additional federal revenues arising out of economic growth. On both issues, CRFB believes the draft takes the "proper and fiscally responsible postion."

MacGuineas lays out several of the reasons why the budget baseline used to score tax reform should assume the expiration of the various tax extenders. First, reinstating an expired tax break counts as a tax cut and should be paid for. Second, many of these provisions were intended to be temporary stimulus in response to the Great Recession, such as bonus depreciation rules intended to boost business investment and tax relief for mortgage debt forgiveness. Finally, it is wrong to assume that every tax provision will always be extended: the fiscal cliff legislation at the end of 2012 let almost one-third of the tax provisions set to expire permanently lapse.

Finally, and most importantly, enacting tax reform from a baseline that includes extenders would make an unsustainable debt situation even worse – adding between $460 and $960 billion to the debt. Under current law with a war drawdown, debt levels will grow slowly from about 73 percent of GDP today to 77 percent by 2024, which still leaves debt at unacceptably high levels and will require additional deficit reduction to stabilize the debt. Enacting tax reform relative to a baseline that assumes the extension of expiring tax provisions will increase the debt by 3 to 4½ percent of GDP – to as much as 81 percent if bonus depreciation is included.

The second issue concerns how to address additional revenue that may materialize from economic growth. The draft lowers rates and increases fairness in a pro-growth way, and is estimated to produce $50 to $700 billion of new "dynamic" revenue that could come from a healthier economy. The draft devotes this new revenue to reducing deficits, rather than cutting tax rates. MacGuineas' letter affirms that this is the responsible position.

These new revenues are extremely uncertain and fall in a wide cost range. Given this uncertainty, it is better to "treat the potential dynamic effects of legislation as a 'bonus' to help further reduce the deficit and put the debt on a sustainable path."

Although the draft is not perfect – it did not devote any revenue to tackling our large and growing national debt – Camp took the most fiscally responsible positions on two critical issues: not automatically assuming that the extenders will be charged to the nation's credit card and not counting dynamic revenue before it materializes.

See CRFB's full letter to Chairman Camp here.

A post in the same vein, Camp Makes Responsible Choices on Tax Extenders, commended Chairman Camp for his decision to pay for the extenders which he chose to continue.