The Agenda

On Wyden-Gregg

My Manhattan Institute colleague Diana Furchtgott-Roth has a good piece at Real Clear Markets today addressing the bipartisan Wyden-Gregg tax reform proposal. The proposal (from Democrat Ron Wyden and Republican Judd Gregg) is an approximately revenue-neutral plan to broaden the personal and corporate income tax bases while cutting tax rates.

Since it’s a bipartisan plan, there’s something for both Republicans and Democrats to dislike, but the proposal would do a great deal to simplify the tax code and reduce its economic drag per dollar of revenue raised. Personally, I’d go even farther to broaden bases, including phasing out the deduction for home mortgage interest and significantly curtailing the health insurance tax exclusion.

But the plan might hit a snag in part because this is kind of an odd time to propose a revenue-neutral tax reform with no adjustments on the spending side. Federal budget deficits are projected at approximately $9 trillion over the next decade, and would be approximately the same if Wyden-Gregg were enacted. This is because the key driver of future deficits — unrestrained entitlement costs — cannot be addressed with tax reform.

Of course, every reform does not have to fix every problem. Wyden-Gregg won’t bring peace to the Middle East or cure cancer, and that’s fine. But I think it’s unlikely that members of Congress will use political capital to reach a bipartisan fiscal reform deal that doesn’t actually address our most important fiscal challenge. (Especially because they would be vulnerable to criticism when further changes — on the tax or spending side — proved necessary.)

I think Rep. Paul Ryan, with his own fiscal reform plan, got the focus better for the challenges we face today.  His plan includes tax reform (and simplification) as a key component, but its primary thrust is saving money on the spending side — and as a result it shrinks deficits over the long term.

One could imagine a bipartisan deal in a similar form to Ryan’s plan but with higher revenue levels and less aggressive benefit cuts. (Indeed, at least with regard to the health-care aspects of fiscal reform, Ryan has said “if Ron Wyden and I were in a room, we could hammer out a deal by tomorrow.”)

Wyden-Gregg is a plan that could serve as a foundation for tax reform within a broader fiscal reform, so it’s good that the senators are out promoting these ideas. But I think tax reform will ultimately have to be folded into an overall reform that also addresses the long-term budget outlook.

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