The voices of Tax Policy Center's researchers and staff
President Trump and the congressional Republican leadership promise to unveil a tax plan shortly. If past experience and recent trial balloons are any guide, it may include some egregious gimmicks –all aimed at lowballing the projected amount of federal revenue the proposal would lose.
Much of this legerdemain would allow Congress to avoid the implications of its own rules for scoring tax bills. Congress could do this by making tax cuts temporary, front-loading revenue, or playing games with economic or fiscal assumptions.
Here are three gimmicks to watch:
Temporary tax cuts. There is lots of chatter about how Congress may minimize the revenue loss by making some tax reductions temporary. The math is simple: A permanent tax cut that reduces federal revenue by, say, $10 billion-a-year would add $100 billion to the deficit over a decade. But if Congress makes the bill effective for only three years, it would appear to cost only $30 billion over a decade. This was the game Congress played for decades with dozens of temporary tax cuts that it then extended a year or two at a time.
Temporary cuts can also avoid important Senate rules. In 2001 and 2003, Congress enacted tax cuts that expired after 10 years so they could be passed by a simple majority vote under the Senate’s budget reconciliation rules.
Temporary tax cuts make sense only if Congress wants to boost a stagnant economy with a short-term stimulus. But the US is close to full employment and the Federal Reserve is raising interest rates. In that environment, big deficit-busting tax cuts would do little more than accelerate those interest rate hikes. And for what? The tax cuts might change the timing of economic activity but not the overall amount of business investment or hiring.
Imagine a provision that allows firms more generous tax write-offs for capital investment-- but only from 2017-2020. All else equal, firms might accelerate their investment decisions to take advantage of the tax break. But once the special tax breaks expire in 2020, investment would slow.
Purported revenue raisers that are not. Yet another variation on the theme, these are efforts to get people or firms to pay taxes today in exchange for some future benefit. One example: Allowing or even requiring holders of traditional retirement accounts to transfer those assets to a Roth-type account. Shifting money out of traditional accounts would be treated as taxable distributions and generate billions of dollars in short-term tax revenue. But all future income earned in those accounts would be tax free—a deal that would cost the government a bundle in the long run. The last time a similar idea surfaced, in 2006, my TPC colleague Len Burman figured it would raise $6.5 billion over the first 10 years but lose $14 billion (in present value terms) in the long run. Eliminating traditional IRAs entirely and leaving only Roth’s would result in a similar story.
Budget gimmicks. They are not specifically tax provisions, but rather ways to game the budget rules to mask the true cost of a tax bill. The Administration and the House Budget Committee are already using implausibly high economic growth assumptions.
It is true that a stronger economy would generate additional revenue that could mitigate the cost of a tax cut. However, TPC projects that a plan consistent with President Trump’s recent tax outline would produce no economic boost in the first decade and slow the economy in the following 10 years. Nonetheless, tax cut proponents only need to assert the economy will be more robust to reduce the paper cost, at least the way Congress keeps score.
Another gimmick would manipulate the baseline the Congressional Budget Office uses to calculate the cost of a tax cut. That baseline is necessary for CBO to measure how much a new tax law would raise relative to the current system.
But the definition of “current system” is ambiguous. Congress traditionally defines it to mean current law--so that if a tax cut is scheduled to expire, it is scored as if it comes off the books. But if Congress assumes that a number of expiring tax provisions won’t really expire, it can slash the revenue baseline by $440 billion over 10 years, effectively making any new tax cut look nearly half-a-trillion cheaper than it really would be. Sweet.
Each of these gimmicks is probably worth a blog post on its own. And we’ll come back to whichever appear in the next tax bill. But as you watch a tax plan evolve, keep a close eye on this fiscal fakery.
Posts and comments are solely the opinion of the author and not that of the Tax Policy Center, Urban Institute, or Brookings Institution.
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