Closing Tax Loopholes: A Political Compromise for the Budget Conference Committee

November 7th, 2013

With the government running again, the joint Senate and House Budget Conference Committee has begun meeting to hammer out, if not a grand bargain, at least a small one. The Committee must deliver a report by December 15 and, to avert another shutdown, Congress must extend government funding by January 15.

It’s difficult to overstate the political importance of a compromise, but the economics are important here, as well. The federal deficit has been declining since it hit a high of 10.1% of GDP in 2009 (though most American’s don’t know it). The deficit today is about 7% of GDP and the Congressional Budget Office (CBO) expects it to fall to about 2.4% of GDP by 2015.

Yet the CBO does not expect this downward trend to continue. As a result of an aging population, rising health care costs, and growing interest payments, the CBO expects (if policy remains at the status quo) the deficit will begin rising again the coming decade. In the long-term this is a rather significant problem to the extent that it contributes to a continued growth in public debt, which will likely exceed 71% of GDP by 2018.

While economists don’t agree on timing, most will say that the U.S. federal government needs to bring its expenditures in line with its revenues. On the expenditures side, many analysts and politicians have focused on the importance of reducing entitlement spending. For good reason—the cost of Social Security Insurance, Medicare and Medicaid are expected to grow at levels that many term unsustainable.

Though in economic terms revenues do present as thorny a problem as expenditures, in political terms they are nearly disastrous. In the short-run at least, raising revenue through tax increases may be impossible. It is this very issue that threatens to derail a compromise from the Budget Conference Committee. House Democratic Leader Nancy Pelosi has ruled out any compromise that does not include new tax revenues. Many House Republicans have said tax revenue increases are unacceptable.

So is there a way to avoid yet another train wreck?

Maybe. Several Republicans have hinted that revenue increases could be on the table, just not from taxes. For example, Representative Tom Cole (R-OK) has said he’d be open to “more energy exploitation and production and bringing stranded profits home (a veiled hint at another repatriation holiday, which would raise revenue in the short term while lowering taxes in the long run).” The Obama Administration, meanwhile, has suggested reframing tax increases as “user fees.” For example, the White House has proposed imposing a $5 charge per one-way flight, raising the fee to $7.50 by 2019, and in the process raising $25.9 billion over ten years.

One other option that deserves more political attention is closing tax loopholes. Similar to these other compromise positions, closing loopholes would raise government revenue, but technically would not raise tax rates. In particular, the Conference Committee should look closely to those loopholes created by offshore activities and tax avoidance and evasion tactics. For example, Congress could expand the enact the Cut Unjustified Tax Loopholes Act, would close loopholes and strengthen enforcement measures against offshore tax haven abuse, raising nearly $200 billion over ten years.

These types of measures would help, but it’s also true that—in economic terms—these measures are not sufficient to significantly change the deficit outlook over the long-term. Yet they might be enough to achieve a political compromise. Right now, politically, if not economically, a compromise is exactly what America needs.

Written by Ann Hollingshead

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