Is a Revenue-Neutral Tax Proposal Equivalent to a Tax Hike?

Yesterday, House Ways & Means Chairman Charlie Rangel released his long-awaited “mother of all tax reforms” (which isn’t really true tax reform) that would basically raise taxes on the very wealthy to pay for tax cuts for those who are modestly wealthy (AMT class) and small tax cuts for some in the middle and bottom. But Republicans have responded by claiming it amounts to a $1.3 trillion tax hike, since that’s the total amount of money raised from only the tax increase provisions in his proposal.

Regardless of whether one supports Rangel’s bill or not, calling it a tax hike is somewhat dishonest . Of course it’s a tax hike on some people, but it also cuts taxes for others, too. It’s more of a “tax shift.” Overall, the bill does not raise the average tax rate on the U.S. economy (under static scoring). The Republicans should attack the blatant tax shifting in the bill and call it class warfare rather than attack its revenue neutrality.

The danger of using this logic is that Republicans could just about kill any tax reform measure that would ever come up — even if it was the greatest tax reform measure ever put in place. Many Republicans support the FairTax or a flat tax. But even if those reforms were put in place so as to raise the same amount of revenue (i.e. revenue neutral), using this logic, some could call it a “big tax hike” because not everyone’s tax bill would remain exactly the same. When the President’s Tax Reform Panel put in place a pretty good tax reform measure two years ago, many Republicans used this same language to kill it then because, although it lowered rates, it limited certain deductions like the mortgage interest deduction, so they used the “tax hike” language to help kill it. (Charlie Rangel wasn’t much better in his opposition to that proposal.)

If Republicans want to talk about short-term tax hikes, then they should focus on the expiring of the Bush tax cuts in 2011. (Whether it’s a “tax hike” is essentially semantics, but the fact of the matter is everyone’s tax bill is going up in 2011.)

But anyone who wants to label bills “tax hikes” and discuss long-term budgets (in the long-run, taxes must equal spending) should consider that by passing Medicare Part D, the Republicans in Congress already put forth one of the biggest tax increases in American history — to be paid for by a “tax hike” on future generations.