Number: RS22242
Title: Tax Reform and the Goal of Revenue Neutrality
Authors: Gregg Esenwein, Government and Finance Division 
Abstract: The President's Advisory Panel on Tax Reform has been tasked to issue a report with revenue neutral policy options for reforming the federal Internal Revenue Code. The executive order establishing the Advisory Panel specifies neither the baseline nor the time horizon for achieving revenue neutrality. If the Advisory Panel uses current law (the CBO revenue baseline) as its benchmark for revenue neutrality, then the reform proposal will have to raise taxes relative to their current levels by $2.3 trillion over the next 10 years. However, using current law as its benchmark is problematic because current law does not fully take into account anticipated or possible changes to the tax system. If the Advisory Panel includes the effects of these possible changes to the tax system in its baseline for determining revenue neutrality, then its 10-year revenue target would be substantially lower than under the CBO baseline. But relative to the CBO baseline, under this benchmark, the deficit could increase by approximately $2.6 trillion over the next 10 years. The Advisory Panel has indicated that it plans to recommend repeal of the alternative minimum tax (AMT) for individuals as part of its reform options. Unless the revenue loss from the AMT were fully replaced, the deficit would increase considerably over the next 10 years compared to the CBO baseline. In addition, if the Advisory Panel chooses a five-year time horizon as a benchmark for revenue neutrality, then it would significantly understate the potential long-run (beyond 2010) costs of tax reform.
Pages: 6
Date: September 7, 2005