Tax reform is back in the public policy discussion again, and that’s a good thing.
It’s largely recognized that our current tax code inhibits economic growth because it drives capital and thus jobs offshore, puts U.S. corporations at a competitive disadvantage, and particularly disadvantages our manufacturing industry. It also fails to encourage the saving and investment necessary to drive real, sustained economic growth. And its complexity imposes unneeded compliance costs on individuals and businesses, draining resources that could go toward more productive ends.
Tax reform should lead to higher revenues for government without having government consume a greater percentage of the nation’s output. In other words, government gets more pie by baking a bigger pie, rather than just taking a bigger share of the same-sized pie.
But a number of those pushing tax reform have got the cart before the horse. They’re looking to tax reform with the immediate goal of increased revenue for government—in other words, what they’re really advocating is a tax increase in the guise of tax reform. A bigger serving of pie for government without growing the pie for everyone else.
Indeed, raising government revenue to 21 percent of overall GDP is an overt goal of the tax reform plan being pushed by Alan Simpson and Erskine Bowles of President Obama’s fiscal commission, and the general tenor of comments made by President Obama himself.
This is the wrong approach. More economic growth should be the goal of tax reform, not a bigger share of the economy consumed by government.
Put simply, tax reform designed to give the government a bigger share of the economy will hinder economic growth, and is thus self-defeating. Numerous studies have shown that government revenue as a share of GDP has been remarkably constant: just under 19 percent of GDP in the post-WWII era, despite every attempt by government to raise it.
The government is just not going to get much more than 19 percent of GDP whatever it tries, so the only real way to increase government revenue is by increasing GDP—that is, economic growth.