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Pat Toomey Gets it Right on Tax Reform

2 min readBy: Alan Cole

Senator Pat Toomey of Pennsylvania wrote an excellent piece in National Review on the subject of taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. reform. He recognizes that tax reform is an outstanding opportunity for lawmakers to make a real difference in the economy, but he also realizes that this potential could be wasted by the need to stick to arbitrary Congressional scoring rules.

One of these rules is revenue neutrality – particularly, revenue neutrality on a static basis. The requirement of revenue-neutral tax reform can result in pitfalls, and this is especially true on the corporate side. Almost any tax revenue drawn from corporations, in one way or another, is a tax on investment in America, and it is therefore difficult to create dynamic growth without being explicitly non-neutral on a static basis.

Senator Toomey is right that the answer is to move towards dynamic scoringDynamic scoring estimates the effect of tax changes on key economic factors, such as jobs, wages, investment, federal revenue, and GDP. It is a tool policymakers can use to differentiate between tax changes that look similar using conventional scoring but have vastly different effects on economic growth. of tax reform bills – to make sure that revenue remains sufficient after accounting for the growth that tax changes would create. In this respect, Chairman Camp’s request for a dynamic score clearly is a move in the right direction. If Chairman Camp were allowed to create a tax plan that was revenue-neutral on a dynamic basis, it’s likely he would not have been hamstrung into including some of the more dubious offsets in his plan. For example, Senator Toomey is right when he says lengthening depreciationDepreciation is a measurement of the “useful life” of a business asset, such as machinery or a factory, to determine the multiyear period over which the cost of that asset can be deducted from taxable income. Instead of allowing businesses to deduct the cost of investments immediately (i.e., full expensing), depreciation requires deductions to be taken over time, reducing their value and discouraging investment. schedules reduce the incentive to invest in jobs in the United States, and that this problem tends to offset the growth one might get from lowering corporate rates.

Additionally, Senator Toomey’s skepticism of extenders – “temporary” tax provisions that are always scheduled to expire but end up being re-instituted every year – is well placed, and extenders certainly further muddy the waters of tax reform.

Senator Toomey’s piece is a good contribution to the conversation on tax reform, and well worth the read.