Arcane Budget Rules Threaten Tax Reform


In a recent Washington Post column, Robert Samuelson wrote that President Trump has inherited a “low-growth trap” and that America has “entered a new era of low economic growth and high political disappointment.” Samuelson is right about low-growth: the Congressional Budget Office projects just 1.9% GDP growth over the next 10 years, much lower than the historic post-war average of 3% growth. We need aggressive, pro-growth tax policies to bring us back to the historic average, but Congress’s arcane budget rules and inaccurate scorekeeping threaten to stop tax reform dead in its tracks.

To achieve true pro-growth tax reform — one that spurs rapid economic growth, investment, and job creation — Republicans will have to employ the budget reconciliation process requiring only 51 votes to overcome a likely filibuster by Senate Democrats. However, using reconciliation to enact tax reform brings other procedural complications. For one, congressional scorekeepers are unlikely to fully account for the positive impact that pro-growth tax reform will have on revenues. Additionally, reconciliation rules forbid tax reforms that increase the deficit outside of the “budget window,” which traditionally has lasted ten years.

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Therefore, under reconciliation, some believe that tax reform must either be revenue neutral (according to congressional scorekeepers) or expire after 10 years (this is why the Bush tax cuts had a 10-year expiration). But a 10-year timeframe for tax reform undermines its effectiveness in promoting growth and investment, since many business decisions depend on forecasting far beyond that period. For instance, how would a U.S. multinational corporation make an effective decision about where to locate its operations if territorial taxation, in which only local income is taxed, disappears after only 10 years?

But, thankfully, this is not a binary choice. Senator Pat Toomey (R-PA) has a solution: expand the budget window to 20 or 30 years. The current 10-year window is only a historical practice, not a statutory obligation under the Congressional Budget Act of 1974. Twenty to thirty years of pro-growth tax reform would be as close to permanent as possible (since Congress would likely overhaul the tax code again within that time) and would provide the certainty needed for American businesses to make long-term decisions. Further, an expanded budget window would more accurately capture the impact of entitlement reforms, which produce exponentially larger budget savings beyond 10 years.

Congressional Republicans have a once-in-a-generation opportunity to enact pro-growth tax reform. They shouldn’t settle for a temporary tax cut, which would do little to strengthen long-term productivity growth and global competitiveness. They must not let outdated budget rules, which can easily be changed given their current congressional majority, stand in the way of increasing domestic growth, creating jobs, and raising wages for all Americans.

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