A ‘Revenue Trigger’ Isn’t the Solution to Fiscal Responsibility

by Veronique de Rugy

Senators Corker and Lankford are worried that the tax-reform bill that just got out of the Senate Finance Committee will grow the deficit, and hence the national debt. This is a very reasonable concern, which everyone knows I share. However, the solution isn’t to implement a trigger in the bill that would terminate some of the tax cuts if the projected revenue does not materialize.

There is so much wrong with this proposal that it is hard to know where to start. But I will try.

First, our debt problem is not a revenue problem: It’s a spending problem. To some important extent, it is also a growth problem. Tax increases and the uncertainty introduced by this trigger won’t address these problems. In fact, the trigger will hurt economic growth, and it will fail to address the explosive growth of spending on Medicare, Medicaid, and Social Security. Raising taxes, if it successfully raises revenue, will only scratch the surface of what is needed to fill the gap between spending and revenue in the next two decades. Raising taxes would also be counter-productive if the reason for the below-projection revenues is that the country is in a recession. Oh and by the way, the prospect of a potential automatic tax hikes in the future could hinder business investments and excitement today and accelerate the move toward a slowdown.

Now, we could argue that not all revenue triggers would be as damaging. Dan Mitchell notes:

Any automatic tax hike is a bad idea, but not all tax increases are equally bad. If politicians insert a provision that automatically increases the corporate tax rate, that’s a very bad recipe for uncertainty and the result will be less growth. If the standard deduction for households is reduced, by contrast, the resulting increase in taxable income will give politicians more tax revenue but not cause as much harm.

Still, revenue triggers are terrible ideas. And a trigger that would jack the corporate income-tax rate up would be a disastrous idea. I want to believe that these senators understand this.

A better trigger would be to cut taxes even more if federal revenues are below projections. By that I don’t mean increase the tax credits and other tax-relief measures that do nothing to spur economic growth and do not alter people’s decision to work more rather than less. I mean cut the corporate income tax more along with other taxes on capital and labor.

The Wall Street Journal suggests another trigger:

The pony in this pile is that the budget forecasts rely on a lame 1.9% growth on average for the next decade. The GOP’s bill could restore growth to a 3% historical norm and gin up more than enough money to avoid the trigger. Perhaps the GOP should add a reverse trigger? If revenue exceeds projections, plow the cash into lowering the top marginal rate on individuals to 35%.

This is a good idea. The Joint Committee on Taxation does not have a good track record of projecting policy impacts accurately. It is especially well known for under-estimating the pro-growth impact of corporate tax rate cuts, so this could end working to our advantage. However, I wouldn’t want to chance it. If the economy is growing significantly faster than it is now in a few years as result of tax reform, it shouldn’t be too hard to convince the House and the Senate to reform taxes again.

Another excellent trigger would be to cut spending, all spending, across the board, if revenue projections fall short. That’s what true fiscal responsibility looks like. We could call it “The Spending Cut Trigger Toward Prosperity Act of 2017.” I like it!

In the end, we will see how committed these senators really are to fiscal restraint when Republicans, in the course of passing a budget over the next few weeks, vote to once again burst the spending caps implemented as part of the Budget Control Act in 2011.

Second, the Senate plan already includes several revenue triggers. As I noted two weeks ago, the plan contains many sunset provisions that would jack taxes back up in 2025. Everyone expects that these provisions will be renewed come 2026. However, that would be politically more difficult if the revenue projections look much worse than projected. The WSJ adds:

By the way, the Senate bill already includes other trigger dates: One is the end of 2025 when the cuts for individuals expire, and many of those provisions are budget blowouts, including the expanded child tax credit. Another trigger is the 10-year budget window. Oh, and Nov. 6, 2018. It’s called an election, and Americans hold one every two years. There is zero chance the tax code runs on autopilot without political intervention for six years.

No matter how you look at this idea of a revenue trigger, it is a terrible one. I hope lawmakers will drop it in the same way as they have dropped previous bad ideas such as the Border Adjustment Tax and the reduction of 401(k) deductions.

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