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Tax Reform: Tax Increases Versus More Revenue

08 Nov 2012
Posted by Clint Stretch
Yesterday, Speaker Boehner delivered prepared remarks on finding common ground and averting the fiscal cliff.  These remarks are being hailed in the press for their “conciliatory tone.”  Some even report that the Speaker is “open to increased tax revenue.”
Here’s what the Speaker actually said:

For purposes of forging a bipartisan agreement that begins to solve the proble, we’re willing to accept new revenue under the right conditions.
What matters is where that revenue comes from and what kind of reform it comes from.
What matters is where the increased revenue comes from, and what type of reform it comes from.
Does the increased revenue come from government taking a larger share of what the American people earn through higher tax rates?
Or does it come as a byproduct of a growing economy, energized by a simpler, cleaner, fairer tax code, with fewer loopholes and lower rates for all.
There is nothing new here.  Despite the tone of his remarks, the Speaker is saying “no tax increases.”  Conservative proponents of tax reform have long wanted to change the budget rules so that they get credit for bigger tax collections from hoped-for changes in economic growth that follows tax reform.  The Speaker has merely restated that hope in a conciliatory tone. 
Speaker Boehner offers as proof that his approach will work the 1986 tax cuts. 
Of course, the Tax Reform Act of 1986 did not produce the predicted revenue bonanza.  Congress had to raise taxes in 1990 and 1993 to avoid massive deficits.  A well-conceived and executed tax reform likely would be good for the economy in the long-run, but projecting the size and timing of that benefit is more a matter of guesswork than reliable measurement. 
Liberals who want to correct what they see as an imbalance in tax burdens and to protect federal programs are unlikely to be fooled by the change in tone but not substance. 
When I blow all the smoke away, I think our challenge is that the current tax system, in normal economic conditions, would generate about 18.5 percent of GDP in taxes while we are committed to spending 24.5 percent.  This will not work.  Speaker Boehner’s “balanced” solution is to cut spending and to reform taxes so the economy and revenue grow more, but not to raise taxes as a share of the economy. 
Liberals will see this as an offer to merely cut spending. Perhaps they should test the Speaker’s belief in economic models that forecast growth.  They could offer a “balanced” approach that uses increased revenue from a more efficient and effective tax system to invest in infrastructure, education and health care.  These investments would yield even more growth.  In the meantime, if revenues are insufficient, they might recommend a modest increase in top rates.   

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