As the Trump administration and the Congress draft the 2017 tax bill, it is extremely important that they build it around a deficit neutral, not a revenue neutral, model. This may sound like a word game, but it is not. The difference between focusing the country on a revenue neutral tax and a deficit-neutral tax cut is gigantic. Revenue neutrality means every tax cut must be balanced within the tax code.
To cut taxes in one place, you must raise taxes somewhere else. Inevitably, you hurt some people by raising their taxes while helping others by cutting their taxes.
Revenue neutral tax policies also have a very weak impact on job creation. Raising taxes on some people and companies immediately slows economic growth. It takes significant time for the jobs the tax cuts are supposed to produce to materialize, creating more immediate damage, than benefit.
Furthermore, a revenue neutral strategy perpetuates the idea that there is no connection between government spending and taxes.
Historically, the conservative model for taxes is to tie spending directly to taxes by having a deficit neutral bias. You could only cut taxes if you were saving money. When combined with the feedback from economic growth, this creates a virtuous cycle. Each tax cut leads to more economic growth, which generates more revenue, which leads to another tax cut. This was the model of the Reagan-Kemp Revolution in economic policies, which broke America out of the Carter malaise and led to a decade of extraordinary growth in jobs and wealth.
I first became fascinated with this model of being frugal with government in order to be generous with the working taxpayer 32 years ago when Alvin Rabushka published From Adam Smith to the Wealth of America.
Rabushka focused on the 19th-century British experience of cutting government spending in order to cut taxes, which ultimately led to economic growth. From 1811 to 1891, the British government shrank from 27.1 percent of the economy to 7.3 percent. In that period, the economy grew enormously, so it could sustain a robust but frugal government within a smaller share of the gross domestic product.
Rabushka also studied the same phenomenon in Hong Kong.
I realized then that this frugal-to-be-generous system would allow Republicans to build a large majority for smaller government by making sure people were winning when government spending was controlled.
Those who wanted to focus only on spending cuts, on the other hand, could not sustain their strategy. The pain that resulted from spending cuts in isolation made it impossible for them to build a stable government. Furthermore, spending cuts alone only decreased economic growth and job creation.
In a future series of op-eds and newsletters, I will outline the political advantages of the deficit-neutral tax cuts, including the much larger tax cuts this model permits, as well as the incentive it gives to every element of government to save money and boost non-tax revenues.
Using a deficit-neutral tax model should enable us to lower the corporate tax rate to 15 percent, while also creating substantial tax cuts for the middle class.
Finally, I will close out the series by laying out the historic precedents in both politics and the economy for a deficit-neutral approach, including the capital gains tax cuts of 1997 (the largest in history), which was deficit neutral but not revenue neutral.
Republicans must apply the deficit neutral model when crafting upcoming tax legislation. It is critical to bringing a new era of prosperity to America – and growing our majorities in the House and Senate in 2018.