Can Congress Reform the Federal Tax Code Without Addressing Spending?

August 1, 2006

As the Senate Finance Committee gears up for hearings on federal tax reform this Thursday, the members of the Senate Budget Committee have already taken a big step toward “clearing the decks” for tax reform. Last month, they reported a package of budget process reforms called “Stop Over Spending,” or S.O.S (see here for details).

Why is this important for tax reform? Well, take a look at the chart below and you will quickly see why:

This chart shows that federal spending on entitlements—Medicare, Medicaid, and Social Security—is projected to consume more than 25 percent of GDP in the next thirty years. As the chart also shows, total government spending—for entitlements, defense, and other discretionary programs—has averaged roughly 20 percent of GDP since the early 1960s.

The S.O.S. package is designed to rein in the growth of federal spending. It purports to do this through a variety of mechanisms, including:

• New caps on federal discretionary spending • Establishment of deficit reduction targets • Rein in the alleged abuse of “emergency” spending • A new line-item veto for the President • A “BRAC” style commission that will make recommendations to Congress on the elimination of waste and abuse in government spending • A biennial budgeting process • A bipartisan commission to study the solvency of federal entitlement programs

It’s hard to imagine meaningful tax reform being enacted or maintained in a system without any spending controls. Since taxes are levied to provide revenue for government programs, the anticipated explosion in the growth of entitlement spending in many ways becomes the elephant in the room at the Senate Finance hearings this week. Absent an effort to get spending under control, tax reform could become an exercise in raising revenues rather than broadening the tax base and lowering the rate.

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