In Defense Of Tax ReformInvestors Business DailyAs the teacher of a graduate-level tax policy class at Johns Hopkins University, it was with great interest that I read Chris Tomlinson's Dec. 8 column in the Houston Chronicle. Mr. Tomlinson dedicated his column to criticizing the tax proposal now before Congress, calling it "a bill that promises reckless cuts, the same old loopholes, little simplification and an even larger federal debt." Tomlinson's criticisms would warrant a failing grade in my class. Let's consider each in turn. Reckless Cuts The reform measure adopted by the House would, according to Congress' Joint Committee on Taxation, reduce federal revenue $1.4368 trillion over 10 years. (The Senate passed a similarly-sized bill.) Tomlinson rounded that figure to $1.5 trillion, but what's an extra $63.2 billion among friends? Indeed, $1.5 trillion is a lot of money. But given that the federal government is poised to collect more than $43 trillion over the decade, this "reckless" cut constitutes a mere 3.5% reduction. Tomlinson is correct that sweeping tax cuts don't pay for themselves, but the anticipated economic growth resulting from these cuts would reduce the net revenue loss to something closer to $1 trillion — shrinking this so-called "reckless" reduction to 2.3%. Same Old Loopholes Tomlinson contends: "While congressional Republicans slashed away at deductions claimed by individuals, they left most of the deductions, credits and tax avoidance tactics for corporations in place." In fact, Congress' Joint Committee on Taxation details 37 provisions in the House bill for repealing and limiting deductions, credits and special rules currently enjoyed by corporations. These modifications would raise $818.6 billion over 10 years. The bill uses that money to lower tax rates. Broadening the tax base and lowering tax rates in this manner is the mark of well-designed tax reform. Little Simplification Taxes will never be truly simple for all but, despite Tomlinson's protestations, the House and Senate bills would simplify taxes for most Americans. The House measure simplifies the tax code by scrapping most itemized deductions and nearly doubling the standard deduction to $12,200 for single taxpayers and $24,400 for married couples. And, in a masterstroke of simplicity, the House bill also abolishes the Alternative Minimum Tax. Grapple with the AMT and you'll soon understand why it has been derided as the "epitome of pointless complexity." Larger Federal Debt In what's meant to be a criticism, Tomlinson charges: "Congress' own nonpartisan Joint Tax Committee reports that tax cuts will add about 0.8% to gross domestic product over the next decade, not nearly enough to raise new tax revenues for this bill to pay for itself." Given that the Congressional Budget Office projects U.S. economic output will total nearly $237 trillion over the decade, a 0.8% increase would boost that number by $1.9 trillion. That's the equivalent of adding Italy's economy to our own. When the economy grows, that means that wages, salaries, and income from savings grows. That additional output — in this case, the size of Italy — is additional income for workers and savers. And it is far larger than the loss of revenue to the government. Tax reform should be about raising the people's income, not the government's. The nonpartisan Tax Foundation believes the Joint Committee on Taxation severely underestimates the positive impact tax reform would have on the economy. It estimates the House-passed bill would add $6 trillion to gross domestic product over the decade — the equivalent of adding Italy three times over! So, yes, Tomlinson is correct that the tax reform measures would add to the federal debt. But for every dollar added to the debt, the economy would grow by $1.90, and perhaps considerably more. Class dismissed.
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