Seven years and almost $7 trillion in new debt ago, we released a bipartisan package of tax and spending reforms as co-chairs of the National Commission on Fiscal Responsibility and Reform. At the time, we declared that the era of deficit denial was over. Sadly, the debate on tax reform in the House and Senate suggests deficit denial is not only back but also stronger than ever. Yet the fundamental fiscal challenges we identified in 2010 remain.
We said then and believe now that Congress and the president should come together on a balanced plan that reduces deficits and promotes growth. We called for fundamental tax reform that would cut tax breaks to reduce tax rates and – rather than add to the debt – generate new revenue.
We called for a more internationally competitive corporate tax code but also pressed for continued investment in education, infrastructure and high- value-added research so that the United States can compete effectively in the knowledge-based global economy. We also said tax reform should raise $1 trillion in revenue for debt reduction and be paired with spending cuts and reforms of entitlement programs to bring spending growth under control.
Unfortunately, the tax plan under discussion in Congress ignores nearly all the hard choices we proposed – incorporating only the “goodies.” It reads as if it were developed for a country whose debt problems have been solved, when in reality debt is the highest it has ever been other than around World War II.
When this tax reform discussion started, House Speaker Paul Ryan, R-Wis., and Senate Majority Leader Mitch McConnell, R-Ky., called for revenue-neutral tax reform. While ultimately more revenue is needed, deficit neutrality is likely the best that can be expected in the current political environment.
Yet Congress abandoned even this minimum standard of fiscal responsibility and decided to proceed with a $1.5 trillion tax cut instead. With debt already twice as high as its historical average, financing tax cuts with even more borrowing is reckless.
And the actual bills in the House and Senate are even worse than the $1.5 trillion sticker price – because both include about a half-trillion dollars in phony savings from artificial “sunsets” and other gimmicks. With interest, that means these tax cuts could add $2.2 trillion to the debt.
When we released our fiscal commission report, we were worried about keeping deficits below $500 billion per year and debt below 70 percent of gross domestic product. But if the tax cuts in the current bill are adopted, deficits would exceed $1 trillion by 2020 and debt would exceed 99 percent of GDP by 2027.
Economic growth isn’t going to wash away this debt. Real tax reform can provide a boost to the economy, but higher debt works in the opposite direction. According to the dynamic models from the Wharton School at the University of Pennsylvania, the House and Senate tax bills will increase the growth rate by only 0.03 to 0.09 percentage points per year - and that growth will cut their costs by only one-eighth or less.
This country cannot afford another debt-busting tax cut. Luckily, there is another way. The current tax code will give away roughly $18 trillion of tax breaks over the next decade. Our commission called for repealing most of them to pay for lower rates and reduce deficits, adding back only the most-needed ones and only in the most efficient way. By comparison, the latest Senate bill cuts only $3.7 trillion of tax breaks. Most of the largest tax expenditures – including the tax-free treatment of employer-sponsored health care, the mortgage-interest deduction and tax-free bonds – are virtually untouched.
This country critically needs tax reform to improve economic growth. But higher levels of debt will crowd out productive investment, slow wage growth and ultimately undo any gains from reform.
Bringing our debt under control will require reforming and slowing the growth of health and retirement entitlements. Enacting debt-financed tax cuts will make that harder, both substantively and politically. Substantively, because by worsening the debt situation, it will entail more painful changes; politically, because Democrats will be less likely to agree to entitlement reforms if Republicans won’t allow for sufficient revenue.
Many members of Congress have privately told us they would be willing to make the tough votes for ambitious tax and spending reforms as part of a substantive fiscal plan but only if members on the other side jump in the canoe at the same time.
This is the moment of truth for lawmakers who share our concern about our nation’s fiscal future. They can return to the era of deficit denial, or they can stand up for future generations.
Simpson is a former Republican senator from Wyoming; Bowles served as chief of staff to President Bill Clinton. They co-chaired the National Commission on Fiscal Responsibility and Reform.