This morning, Max Baucus and Orrin Hatch announced their plan to “wipe the slate clean,” eliminating almost every tax credit, deduction, and exemption from the tax code and forcing their Senate colleagues to defend anything they want to reinstate. While reforming tax expenditures can be a progressive, growth-enhancing way to raise revenue, there are a couple of reasons to be wary of the approach outlined in the letter.This kind of start-from-scratch rhetoric is appealing, and it is possible that the process could, in theory, restore only the exact right set of tax expenditures and revenue increases. But it’s important to understand what “scratch” is. As a starting point, the “blank slate” is less progressive than the current code and completely ignores the most important goal of tax reform: efficiently and progressively raising enough revenue to fund the government at adequate levels.
1. A “blank slate” shifts the tax burden from the rich to the middle class. As the Center for American Progress (CAP) has explained, radically reducing tax expenditures and using the savings to reduce tax rates would mean paying for massive tax cuts for the rich with tax increases on the middle class. Baucus and Hatch indicate that they want to maintain the progressivity of the current tax code, but that is very difficult to do if significant revenue is dedicated to rate reduction.
The closest approximation of the Baucus/Hatch “blank slate” is probably the Simpson-Bowles “zero plan,” which would have stripped away most tax expenditures and instituted lower, flatter tax rates. The Tax Policy Center estimated the effects of the plan and found that it would have disproportionately increased taxes paid by low-income and middle-class families, not even taking into account the expiration of the Bush tax cuts for taxpayers making more than $400,000 per year legislated in last year’s “fiscal cliff” deal. If you compare average federal tax rates under the zero plan and under current law, the zero plan looks even worse — it would actually cut taxes for the top one percent by 10 percent, while more than doubling tax rates for the poor and increasing taxes on the middle class substantially.
Note that the zero plan left in place some crucial tax credits for low-income working families. The Baucus-Hatch letter does not specifically address these credits, but it would be impossible to maintain anything like the progressivity of the current code without them.
The Simpson-Bowles zero plan also raised revenue by $80 billion per year. A revenue-neutral “clean slate” bill, or one that raised less revenue than Simpson-Bowles, would be substantially more regressive because it would use the extra money raised from low-income and middle-class families to pay for deeper rate cuts, which would disproportionately benefit the rich.
2. A “blank slate” that doesn’t raise revenue locks in the biggest problem with our tax code. This morning’s letter explains that there is a tradeoff between revenues and rate cuts but takes no position on what the appropriate mix should be in a final reform bill. While Baucus and Hatch seem to feel that decisions about revenue are an afterthought, they should be at the core of any tax reform plan. Congress should not be engaging in protracted tax reform negotiations that ignore the fundamental problem with our tax code: It does not raise sufficient revenue to fund the operations of government at appropriate levels in a sustainable way.
If Baucus and Hatch are interested in reforming tax expenditures, they should start by scaling back the biggest giveaways to corporations and the rich and devoting that revenue to repealing the sequester, not reducing tax rates for these same corporations and wealthy individuals. CAP has outlined just such a package. A longer tax reform process should not hold up these crucial short-term revenue reforms. Ensuring that the government takes in enough revenue to meet current basic funding needs, and raises that revenue in a progressive way, should be viewed as prerequisites to any broader tax reform, not an afterthought in the process.