Texas Insider Report: AUSTIN Texas The 12 members of the Bipartisan Congressional Supercommittee" have been appointed and given the Republican members it is safe to say that taxpayers can rest a little easier. But the makeup of the committee conservative Republicans who refuse to raise taxes and liberal Democrats who refuse not to will make it difficult to reach a consensus.
And that doesnt factor in three looming pitfalls that could undermine their effortand the economy.
The deficit is a moving target. The purpose of the supercommittee is to find $1.5 trillion in additional deficit reduction by November 23. However economic growth assumptions built into the already-signed budget-ceiling deal could make it almost impossible to actually achieve that goal.
As the Wall Street Journal reports when the Congressional Budget Office scored (i.e. calculated the financial impact) the debt-ceiling agreement it assumed the economy (GDP) would grow 3.1 percent this year and 2.8 percent in 2012. Thats about as likely as Warren Buffett naming me his heir.
If the economy continues at the current pace GDP could grow less than 1 percent this yearand we may actually slip into a recession. That means that the governments assumptions about tax revenue are too optimistic.
Lower-than-projected revenues mean higher-than-expected deficits eating into the debt ceiling much faster than anticipatedand reducing the impact of any proposed deficit reduction plan. To put it in family-budget terms if a family works out a debt-repayment schedule and then realizes the primary earner will be working half-time rather than full-timeor in my case that I wont become Buffetts heirthe whole plan is shot.
Ironically if economic growth remains low we could find ourselves bumping up against the debt ceiling just before the 2012 electionundermining the one benefit President Obama thought hed gotten from the debt-ceiling agreement.
Tax increases ≠ tax revenues. The annual budget deficit is a result of the gap between federal spending and federal revenuesa $1 trillion-plus gap this year for the third year in a row. That gap can be reduced by cutting spending or increasing revenues or both. Look for the Democrats to push heavily for the increased-revenues option.
However they along with nearly every mainstream-media pundit repeatedly confuse raising taxes with increased revenues. President Obama also regularly makes this mistake. New taxes and higher tax rates can result in increased revenues but they can also lead to lower revenues. Conversely lower tax rates can result in lower revenues but can also lead to increased revenues.
The classic example of this error was the new luxury tax that was part of the 1990 budget deal that helped end President George H.W. Bushs ambitions for a second term. Congress imposed a 10 percent tax on high-end cars boats jewelry and private planes during a recession when sales of those items were already down. Anticipating the Obama-mantra by two decades Democrats assured the American people that the rich could afford it and ought to be forced to pay their fair share."
But a funny thing happened on the way to shared responsibility" whether the rich could afford the new tax or not was irrelevant; they decided not to buy those itemsat least not in the U.S. And so sales of luxury products plummeted along with the tax revenues.
Of course some of the rich may have pulled a John Kerry one of the supercommittee members and bought their yachts overseas as the senior senator from Massachusetts did not long ago in order to avoid paying state taxes.
The luxury tax wiped out jobs and nearly killed the domestic yacht industry and hurt the others so Congress quickly repealed it.
The point is that increasing tax rates will not necessarily increase revenues and may actually reduce them. Yes tax revenues are currently low as a percent of GDP but thats because of a slow economy not because people are undertaxed. Get the economy growing and the tax revenue will follow.
The allure of thinking small. In Washington grand visions are usually beaten down until they become bland visions"accomplishing little besides tweaking the status quo. Thats exactly what the supercommittee will do unless members commit to thinking big.
One way to do that is to propose a Simpson-Bowles-type income tax reform. Lower the tax rates significantly on individuals and corporations and eliminate most or all of the current tax breaks. While this may seem like a bridge too far" people both on the left and right are increasingly embracing it as the best solution.
Done right it would simplify the tax code eliminate many or all of the special tax breaks that reduce revenues return stability to the economy and spur economic growth which would increase federal revenues.
Depending on the details I think the Republicans could be convinced to take this 
approach and would only need one Democrat to agreethough several would be better. Do that and the committee of 12 will earn that modifier super."
The Institute for Policy Innovation (IPI) is an independent nonprofit public policy organization based in Dallas Texas. Resident scholar Dr. Merrill Matthews is available at (972) 874-5139 or erin@ipi.org.
