Last week the Senate Democrats released their 2014 fiscal year budget titled Foundation for Growth: Restoring the Promise of American Opportunity. This 100-plus page document outlines a proposal to raise taxes by $975 billion dollars and replace the sequester with slightly smaller budget cuts, a $240 billion increase in spending over the next ten years over the CBO baseline.
This budget is essentially a continuation of the status quo. It simultaneously ignores America’s future fiscal problems, especially with regard to Social Security and Medicare, while promising “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” that amounts to adding complexity to the system and more aggressively going after corporate foreign-earned income. Those of us looking for meaningful tax reform will be disappointed by the direction of this budget proposal.
On the spending side, the replacement of approximately $1.2 trillion dollars in sequester cuts with $960 billion in other cuts prevents meaningful efforts to cut government spending. These cuts include reductions in Pentagon spending, more Medicare price controls, and an assumed reduction in interest payments. Looking at the budget side-by-side with the CBO’s baseline for this year, spending as a percent of GDP is essentially unchanged (it actually goes up!).
After outlining proposed spending shifts, the budget also outlines its principles for tax reform. These principles include: ensuring the tax system stays at least as progressive as it is, eliminating tax breaks for the wealthy, decreasing complexity, and improving competitiveness of U.S. companies.
Unfortunately, if you look deeper into what the Senate Democrats are proposing, there is no real reform; this is simply the preservation and expansion of the problematic system we already have.
First, the Senate Democrats’ plan will eliminate or modify credits and deductions for the wealthiest Americans, while keeping or expanding them for everyone else:
“Tax reform should eliminate or modify tax breaks that disproportionately benefit the wealthiest Americans, aggressively address the tax gapThe tax gap is the difference between taxes legally owed and taxes collected. The gross tax gap in the U.S. accounts for at least 1 billion in lost revenue each year, according to the latest estimate by the IRS (2011 to 2013), suggesting a voluntary taxpayer compliance rate of 83.6 percent. The net tax gap is calculated by subtracting late tax collections from the gross tax gap: from 2011 to 2013, the average net gap was around 1 billion. and offshore tax abuse, and eliminate unfair and inefficient business tax loopholes.”
I am all for closing tax loopholes, but what the Democrats are proposing will add more complexity to the tax system by creating more rules and exceptions to credits and deductions. Real tax reform would get rid of all loopholes that both add complexity and favor certain activities over others. Eliminating the education tax credit for the top 1 percent while leaving or expanding it for everyone else may raise more money, but it doesn’t deal with its inherent complexity or the inefficiencies that make it bad tax policy.
Next, the Democrats want to tackle corporate taxation. Although they acknowledge the need for reform, especially with regard to loopholes, they are focused in the wrong place. Democrats are actually going in the opposite direction on corporate tax reform. Instead of tackling the problem head-on by lowering rates, simplifying the code, and moving to a territorial system, they will instead further cripple U.S. corporations by more aggressively pursuing foreign-earned income.
Real reform involves doing what most of the world has done by lowering our highest-in-the-world corporate income tax rate and moving to a territorial system. This will not only increase the competitiveness of U.S. corporations but would also increase economic growth and boost total government revenue.
Even more disheartening, there is no mention in the budget proposal that America already has the most progressive tax system in the world and its high tax burden on investment income. These issues need to be tackled if the government wants to establish a tax regime that fosters economic growth.
Essentially, the principle underlying the Democrats’ budget proposal is this: set a revenue goal and find a way to raise it with little regard to how it is raised. Although it mentions some things that are wrong with our tax system, it makes no real attempt to fix them; it instead makes America’s tax system more complex by adding more rules and exceptions for deductions and credits, and harms America’s competitiveness by taxing corporations even more just to reach its goal of $975 billion dollars.
Real tax reform should consider the fact that not all taxes or tax systems can be treated equally. Just because it raises revenue does not mean it is a good reform. Instead of increasing the tax burden and adding complexity, we should establish a system operates on sound tax policy and fosters economic growth.
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