Over the past few years, there’s been a growing trend of Democrats and their allies in the media using the phrase “new revenue” as a euphemism for tax hikes. As Republicans struggle to find ways to strike a deal with President Obama while claiming to honor their pledges not to raise taxes, they are edging closer to embracing this new terminology. If that happens, it would have dangerous long-term consequences for tax policy.
On Monday, House Speaker John Boehner sent a letter to President Obama suggesting the parties strike a deal along the lines of one previously suggested by Erskine Bowles, under which Republicans would agree to boost federal revenue by $800 billion while Democrats agree to spending cuts. Here’s how Boehner defines “revenue” in his letter:
Notably, the new revenue in the Bowles plan would not be achieved through higher tax rates, which we continue to oppose and will not agree to in order to protect small businesses and our economy. Instead, new revenue would be generated through pro-growth tax reform that closes special-interest loopholes and deductions while lowering rates.
There’s been an ongoing debate over what counts as new “revenue” under this formulation. For instance, conservatives would be fine with the federal government collecting more revenue if the increased flow was the result of a more efficient tax code that boosted economic growth. But as I’ve noted, Bowles does not favor the use of dynamic scoring, a practice that accounts for growth-generated revenue. So that means if Republicans were being faithful to Bowles, the dollar value of the loopholes and deductions they’d be eliminating would have to exceed — by $800 billion — the lost revenue resulting from any reduction in tax rates. And that would be a clear tax increase.
If Republicans agree to raise taxes, they should just own up to it. They should argue that the best deal that they could get with an intransigent Obama still in office was to extend the rates on lower brackets, and they should express regret that they couldn’t prevent tax hikes on those with higher incomes. This would no doubt be a political defeat. But an even worse outcome would be for Republicans to negotiate a weaselly compromise in which they keep the rates the same, but get rid of $800 billion in loopholes and deductions, and then go around arguing that they merely agreed to “new revenue” rather than higher taxes. Not only would this be dishonest, but it would add bipartisan legitimacy to the practice of claiming that tax increases are merely “new revenue,” thus making it easier for Democrats to raise taxes again down the road.