Tax Cuts to Raise Revenue Should Work: Method

By Nick Levinson

Tax cuts, especially Federal, are debated as to whether they produce net gains. Proponents say lowering taxes induces investments, so more taxpayers pay taxes; so that, even at lower rates, total collections go up. Opponents say that doesn’t actually happen; tax cuts lower total revenue and national debt goes up.

But usually they should work. The problem is that they’re mismanaged. Likely, they often fail, but shouldn’t.

We have an analogy. Many major stores, run by highly skilled executives, have sales all the time. Even stores that refuse coupons have sales. They do it because they increase profits by attracting new customers, by persuading customers to spend more than they would have otherwise, and by introducing customers to products they wouldn’t have tried otherwise and to which enough of them soon become loyal at regular prices for a while.

So, what’s the difference?

Stores usually do not announce ahead of time what will be on sale. A one-week sale that starts on a Sunday may not be announced even on the Saturday just before. Probably most customers expect sales but very few know exactly what will be discounted, by how much, or when. Sales are short; supermarkets may have them for only a week at a time, limiting customers’ ability and motivation to defer buying a given product until it’s discounted.

And stores do not have to agree with each other on what sales to have or when. Antitrust law may even forbid such agreements among businesses.

Tax cuts, on the other hand, whether Federal or State, are handled legislatively. Enough legislators have to agree on a cut or it won’t happen, and often some legislators doubt its wisdom or oppose it altogether, so, to get enough legislators to vote for it to pass it, trade-offs may be made with some legislators. Those deals produce what is sometimes colloquially called the Christmas tree effect, referring to lots of irrelevant gifts that may cost Santa Claus, or the government, or taxpayers, good money.

And, public discussion may precede a cut by a year, maybe more. If it’s true that whether a Federal tax cut is enacted depends on whether the winning Presidential candidate made it a major part of their platform, then the public discussion before the effective date may be a couple of years long. Many people, including business executives, often then find it easy to spend that much time to adjust their financial decisions so that what they would have done anyway will now get a tax benefit. Then the tax benefit does not produce much macroeconomic gain and may even produce a macroeconomic cost due to deferrals.

A solution is for the legislature to delegate limited tax-reduction authority to the executive branch. Several limits should apply. Outside of the limits, a tax cut could still be enacted by the legislature itself.

The amount would be within one limit. It would be a percentage of the unreduced rate or an absolute net amount of pre-reduction revenues, or a percentage or absolute net reduction of all tax types combined, when pre-reduction is immediately before the reduction or a year earlier. A taxpayer could not legally be denied the benefit on the ground that the revenue reduction from all taxpayers is too much, because the taxpayer cannot evaluate that before claiming the deduction; some other sanction would have to discourage excessive cuts, perhaps the replacement of the people who approve tax cuts.

The starting date should be limited to being within, say, one month of when the cut is promulgated.

The duration would be another limit. The duration would be short. Any tax cut with a duration of at least a year should be left to the legislature to decide. Perhaps a duration of less than a year but longer than four months would be allowed but would require the publishing of a justification, which could be tested for adequacy in Article III courts. If a sunset date is not specified in a cut, a default calculation would be statutorily prescribed.

Which taxes could or couldn’t be cut should be enumerated. Eligible could be the income or excise tax, or a minimum tax could be excluded.

In the executive branch, two committees would consider each tax cut. Each tax cut, including all of the regulatory details, under this delegated authority, would have to be approved by both committees or there’d be no cut. The committees would be equal to each other; one would not supervise the other, although they could discuss a proposal together. One committee would be composed of proponents of tax-cutting generally. The other committee would be composed of proponents of spending, such as for social services, national defense, foreign aid, and debt reduction. Each committee would have a staff it chooses, and each staff would include one or two economists (probably a mainstream economist and a development economist (specializing in low-income macroeconomies)), a lawyer, a research director, and administrative staff. Each committee would have a budget for a library and for consultations, such as with academics. To ensure rapid availability for quora, committee members would be full-time employees of the relevant government and have this as their first duty, being available for other duties, including at other agencies, at other times even if those noncommittee duties are more extensive than the committee duties (much as some people join a military reserve or the National Guard but might also have civilian jobs to be performed between their primary duties with the military). To ensure that committee members are well-informed at decision-making time, they would be kept up to date on issues, proposals, and key views in between, through written materials and briefings open to questions, so that they don’t have to become rubber-stampers pro or con, since rubber-stamping would render only the two committee heads significant.

Rapidity is one cornerstone of this proposal. The committees should be able to order that the effective date be as soon as the business day after their decision if their decision was made by, say, noon Washington time, otherwise as soon as the business day after that. Days for this would normally exclude weekends and holidays. The tax collection authority should have standing rules and draft forms that can be quickly adapted to a new tax cut.

Regulating can be a barrier when taking a taxpayer’s right away. It can invoke rulemaking just for expiry and that can be time-consuming, such as for solicitation and analysis of taxpayers’ comments. The time would mean the extension of a tax cut well beyond what the committees had intended, which could defeat the purpose of the tax cut in question. Therefore, the right should not be taken away as if that was unforeseen. Instead, the right should be temporarily granted until the sunset, which is the expiration at a time first announced when the right was granted. Upon expiration, the previous regulations would automatically come back into effect for those taxpayers, just as they had generally stayed in effect for all other taxpayers. Thus, expiration would not require new rulemaking.

Amending the tax cut would be forbidden, except by the legislature or the judiciary. If the intent would be to reduce the tax cut for a taxpayer, that could be prejudicial to the taxpayer’s tax planning and thus could make the tax system unreliable for a short-term benefit. Forbidding it would encourage the implementers of this system to be more careful before promulgation. If the intent would be to make the tax cut more beneficial to a taxpayer, a new tax cut could be provided, should all other requirements be met.

Solicitation and analysis of the public’s comments should be ongoing, so they don’t delay the start or end of any particular tax cut.

A dispute on the applicability or meaning of a regulation under this authority would be decided by an adjudicator outside of the agency with the two committees and the agency that enforces tax law, with a fast procedure, with the benefit of a doubt on the law (not on the facts) going to the taxpayer, without an appeal against the taxpayer being available to the government, with appealability by the taxpayer lying to the Article III judiciary, and with publicity for the inclarity issue without identifying the taxpayer. If the case was brought by the government against the taxpayer, the government would pay the costs for both parties; if it was brought by the taxpayer, the taxpayer’s costs being free could be awarded by the adjudicator. This would encourage careful wording of future rapidly-adopted rules. It would also solve the problem of a short duration of a rule giving rise to litigation that is not resolvable before expiry of the tax cut so that the resolution does not inform other taxpayers and the government while the tax cut is still in effect.

Studies on efficacy, including for advancing investments and not adding debt, and side effects, including unintended effects, including consequences in each jurisdiction (such as each state), would be performed by the executive branch and could be performed by the committees jointly or separately. Early publication would be encouraged, with some long-term studies being appropriate; early publication would likely require heavier staffing for researchers. The studies would be accurate, published, and, insofar as feasible, replicable. They should contribute to informing legislative and public debate on which tax cuts work and which don’t.

The timing problem would obviously be solved. The tax cut could take effect so quickly that tax avoidance generally could not be fast enough to negate the value to the government of the tax cut. For example, if a tax cut is meant to gain tax revenue from new investment, it could be promulgated too fast for most potential beneficiaries to repurpose previously-committed investment capital in time and therefore the tax advantage would have to come from new investment capital.

The Christmas tree problem would also be solved, once the system is in place. To create the system and put it into place, some legislators may still have to be persuaded with separate quid pro quo benefits, but once the system is instituted, persuasion in the legislature won’t be important any more.

This is not fully insulated against sabotage. If an elected executive’s political base sufficiently wants a tax cut regardless of fiscal consequences, it can still happen. Insulation may not be possible, even at an imperfect but reasonable level. However, the pressure to cut could be channeled towards the legislature as the more potent promulgator, since the limits proposed here would not apply to the legislature itself.

Nonetheless, one form of insulation is possible: Tax cuts by the executive branch under the delegated authority could be barred for one year after the election of a new executive.

Overall, this should work. Further adaptations may be needed, but this would be a starting point for further thought.