Did Somebody Change the Definition of “Revenue Neutral”?

by Joshua Tucker on January 6, 2013 · 6 comments

in Political Economy

The New York Times reports today:

Mr. McConnell did say he would favor reform if it was “revenue neutral,” meaning that any new tax revenue would be matched by spending cuts.

I can think of two ways to define “revenue neutral”, neither of which would be what McConnell is describing. Invertorwords.com defines revenue neutral as a “taxing procedure that allows the government to still receive the same amount of money despite changes in tax laws”; for what it is worth, you can find basically the same definition at the Tea Party Patriots website. This type of definition of course has nothing to say about spending.

The other way to think about “revenue neutral” would seem to me to be a set of policies that leaves the government’s balance sheets (i.e., the deficit or surplus) unchanged. This could encompass both tax and spending, but in this case “revenue neutral” would mean that any new spending increases need to be matched by increased tax revenue, or that tax cuts need to be matched by cuts in spending.

Raising tax revenue and cutting spending might be fiscally prudent (if you are worried about long-term debt) or fiscally irresponsible (if you are worried about stimulating the economy) but it isn’t “revenue neutral”. Perhaps McConnell meant to say “politically neutral”?

{ 6 comments }

Sarah January 6, 2013 at 6:08 pm

That seems to me like an error on the NYT’s part. Re-reading the transcript from today’s show suggests that McConnell meant “revenue neutral” as in your first definition. (McConnell makes reference to doing tax reform “as it was during the Reagan years.”)

http://www.msnbc.msn.com/id/50378102/ns/meet_the_press-transcripts/#.UOn02LamD24

Mihai Martoiu Ticu January 6, 2013 at 6:26 pm

Maybe they should introduce vegetarian energy policy. For every barrel of oil that Shell does not extract from Alaska, burn an acre of forest.

andrew long January 6, 2013 at 6:29 pm

Yes, I think Sarah’s right: he’s referring to closing loopholes and lowering or ending subsidies and deductions, in exchange for lowering tax rates, so the govt sees no net revenue increase. Their argument, such as it is, is that reducing the individual tax burden while “broadening the base” will contribute to growth, which will eventually generate all the revenue they believe is necessary to run the government.

D.O. January 6, 2013 at 6:47 pm

Your second option is called “pay as you go”.

Joshua Tucker January 6, 2013 at 6:52 pm

Thanks Sarah and Andrew for clarifying McConnell’s intent. Probably worth keeping an eye on to see if this just a one-off mistake in interpretation by the NY Times reporter or a more common misusage of the term by either politicians or journalists. Either way, in the absence of anyone else producing evidence that McConnell actually used revenue-neutral in this way, I’m going to go ahead and strike the last sentence of the post.

Peter T January 6, 2013 at 10:11 pm

You may have been right first time if tax reform “as it was during the Reagan years” means cutting taxes more than spending and relying on magic to cancel the resulting deficits – as Reagan did.

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