Tax Limit: Part 5 of the 7 Part Compact BBA Series

This posting is the fifth in a 7 posting series explaining the Balanced Budget Amendment at the heart of the Compact for a Balanced Budget.

Previously, we explained that section 1 of the model Balanced Budget Amendment ensures that the federal government cannot spend more than cash on hand from ordinary revenue sources and plain vanilla full faith and credit borrowing. Then we discussed how sections 2, 3, and 4 of the model Amendment set and enforce an initial constitutional debt limit that limits available borrowing capacity to 105% of the outstanding full faith and credit debt, plus any increase approved by a majority of state legislatures within 60 days. This email explains section 5 of the Amendment, which imposes a tax limit that can plausibly attract cross-partisan support.

Section 5 of the Compact's Balanced Budget Amendment imposes a default rule of requiring two-thirds of each House of Congress to pass any new or increased income or sales tax (including a VAT). It expressly or implicitly excepts from this default rule: 1) revenue increases from a new consumption ("end-user sales tax") tax that completely replaces the income tax; 2) revenue increases from closing tax loopholes; and 3) revenue increases from excises, imposts, fees, fines. These exceptions retain the current simple majority approval rule. By retaining these exceptions from the two-thirds vote requirement, the tax limit is designed to draw the push for new revenue to places where the special interest resistance will be the most intense, giving the political class a strong incentive to reduce spending as much as possible. And if a revenue push does succeed, the tax limit is designed to channel any revenue increase to the areas where it will do the least harm—i.e., with greater reliance on consumption taxes or flatter taxation.

Seems simple, but section 5's tax limit occasionally draws some pretty bizarre criticism. For instance, one critic asserts that our amendment's imposition of a two-thirds vote requirement on new or increased income or sales taxes, including possible VAT taxes, somehow makes it more likely we will get a VAT tax!

That is just not possible.

The federal government already has the power to impose a VAT tax with simple majorities (51%) of Congress under the Constitution as it currently exists. How can requiring two-thirds (66.6%) under our Amendment as opposed to 51% of Congress to vote up a VAT tax make a VAT tax more likely?

Obviously, it can't. Nor is the likelihood of getting a VAT tax increased by the provision of our tax limit that allows for a simple majority vote to impose a new consumption tax IF it completely replaces the income tax. A VAT tax is not a consumption tax.

In essence, this critique of section 5's tax limit boils down to the contradictory claim that taxes will be increased by making it more difficult to increase taxes!

As we scratch our head to try to understand how anyone would think that critique made sense, we do notice, in conjunction with criticism of our tax limit, our amendment is typically called names: "a monstrous trick," "trickery," "tricky," etc. Essentially, blustery name calling is used to bulldoze folks into thinking that the critique makes sense.

It doesn't make sense, however. As you can see.

Tomorrow, we will address section 6 of the Compact's BBA.

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