The Right Way to Pay for Tax Reform

There are many reasons to oppose the destination-based cash-flow tax (DBCFT) — a.k.a. the border-adjustment tax — in the otherwise-good House Republicans’ corporate-tax plan. This excellent piece by a former member of the Senate Banking Committee does an excellent job at summing them up. However, nothing is more puzzling to me than the embrace by Republicans of the notion that they should pay for good pro-growth tax reforms with a tax increase. 

Don’t get me wrong, I like the idea of not wanting the tax reform to add too much to the deficit. But the right way to handle the deficit concern is not to focus on “revenue neutrality” but on “deficit neutrality,” i.e., by cutting spending, too. 

The good news is that it is not hard to find $100 billion a year in spending cuts, which is roughly what DBCFT would raise in theory. Here are a few suggestions:

• Corporate welfare: There is roughly $56 billion in corporate welfare in the budget alone. Get rid of it. Cronyism has a real economic cost not captured in this number — but $56 billion is a good start. 
• Improper payments: According to GAO, there is about $137 billion in improper payments. About $50 billion of that is real and inadmissible improper payments. Let’s get rid of that. 
• Unauthorized appropriations: There is close to $310 billion spent on programs and activities each year even though the authorization of appropriations has expired. Now, leaving aside the fact that this is a total breakdown in accountability and oversight, there is no doubt that many of these programs would get reauthorized if Congress bothered to follow the rules. But can we truly justify continuing to fund the Brown Tree Snake Eradication Program in Guam and the United States–Poland Parliamentary Youth Exchange Program, especially since their authorizations have expired? I am sure that even moderate oversight on these unauthorized appropriations will bring outlays down and that lawmakers can find a good 10 percent to cut from this list. 
• Pell Grants: According to the CBO’s budget options, we could save $6.5 billion a year by limiting Pell Grants to the neediest students. 
• Medicaid: CBO’s budget options scores a saving of $37 billion to $68 billion when imposing caps on federal spending on Medicaid. 
• Health care: CBO scores a saving of $126 billion by repealing all insurance-coverage provisions of the Affordable Care Act, a saving of $41 billion after repealing the individual mandate, and a saving of $42 billion to end the tax preferences for employment-based heath insurance. 
• Others: CBO estimates $36 billion in savings if Congress converts multiple assistance programs for lower-income people into smaller block grants to states; $9 billion if we tighten eligibility rules for food stamps, up to $19 billion to reduce Social Security benefits for new beneficiaries. 

There are many more spending-cut suggestions in the CBO’s budget-options report, here. 

This small sample of spending cuts shows that there is plenty of options to pay for good tax reforms. Moreover, let’s not overlook the tremendous growth benefits of simply lowering the corporate rate and moving to a territorial system. These are good reforms worth pursuing and fighting for no matter what.