Do the Election Results Improve the Odds of Tax Reform?

November 5, 2014

One of the most obvious questions from Tuesday’s election results is: what does this mean for tax reform?

I think it certainly enhances the prospects of Congress and the president reaching a grand bargain on overhauling the tax code, however the likelihood that it will be this Congress and this president making such a deal seem pretty remote.

Even before the election, the conventional wisdom in the tax community was that fundamental tax reform would not be enacted until 2017, after the next presidential election. But, the success or failure of that effort was highly dependent upon three factors:

1. The ability of the new chairmen of the House and Senate tax-writing committees to lay a solid foundation for that debate;

2. The ability of a reform-minded candidate to build national support for tax reform during the 2016 presidential campaign; and,

3. Dynamic scoring becoming the standard method of generating revenue estimates of major tax legislation.

Starting in January 2015, expect the new chairmen of the House Ways and Means Committee and the Senate Finance Committee begin holding a series of hearings on various aspects of reforming the tax system and the numerous “off-the-shelf” options available to them—such as the Flat Tax, X-Tax, FairTax, Cash Flow Tax, and the Camp draft.

But before the tax-writers hold any hearings on the nuts and bolts of tax reform, they would do well to hold some public hearings on the scoring techniques used by the Joint Committee on Taxation.

The JCT has made some substantial changes to their macroeconomic models in recent years but have not published details on what those changes were and what assumptions JCT economists made. Lawmakers should ask the JCT to explain those changes and outline the academic basis of those changes.

Then, the JCT should be required to publicly demonstrate how their conventional and dynamic models work on a variety of stylized tax changes—including tax cuts and tax increases. This would go a long way toward bringing some transparency to the process and give lawmakers greater confidence that JCT is using the newest technology and economic tools.

Lastly, lawmakers should require JCT to allow outside economists access to their models for peer review—as they did in their 1997 and 2001 review panels. Transparency is the key to removing the image that JCT is operating a black box and the key to members of Congress getting reality-based analysis. And reality-based scoring is the key to producing a tax reform plan that will promote long-term economic growth and higher wages for American workers.

Considering the energy to reform the tax code in both the House and Senate, it is quite possible that lawmakers could deliver a comprehensive tax reform bill to President Obama’s desk in 2015. The betting is that he would veto the legislation, which would then thrust the issue to the top of the agenda for the 2016 presidential campaign.

While there is a case to be made that tax reform should be the top issue in 2016, tax reform is key to reviving the economy and American competitiveness, and neither of those can wait until 2017.

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