Many policymakers in Washington recognize that our tax code is counterproductive.
- Compliance is highly complex and costly.
- Various exemptions and deductions create an unleveled playing field among industries, creating tax-driven distortions.
- Targeted tax preferences create winners and losers based on lobbying prowess and cronyism rather than market competition.
- U.S. tax rates are significantly higher than our international competitors, which drives investment and job creation overseas.
- Our insistence on global taxation is an aberration which encourages U.S. companies to leave overseas profits in foreign subsidiaries rather than bringing that capital home to be invested domestically.
- High taxation of savings and investment punishes those productive activities and discourages economic growth.
- And families and businesses are increasingly at risk from requirements to submit sensitive financial and personal information to government systems recently proven to be highly vulnerable.
Given the current challenges and benefits of reform, why haven’t we made an inch of progress?
One major problem is confusion over goals and definitions. When Democrats (and especially President Obama) talk about tax reform, their goal is usually more federal revenue—a tax hike, in other words.
They talk about economic growth, but only the most marginal Keynesian economists argue that extracting even more taxes from the private sector will increase economic growth.
It’s not even clear what some Democrats mean when they talk about economic growth. Indeed, Obama seems to equate economic growth with government growth rather than private sector growth.
When Republicans talk about tax reform, they intend to use tax reform to stimulate the economy to achieve higher rates of private sector economic growth, which would lead to more and better economic opportunities. Importantly, more opportunities eventually lead to more tax revenue, since more people would be working and paying taxes.
But Republicans are also a bit confused, having largely bought into the idea that revenue-neutral tax reform—i.e., reform that is not a net tax cut—will increase economic growth. But according to a recent study by the Tax Foundation, that simply isn’t the case.
The Tax Foundation found that, while a true business tax cut has the potential to stimulate significant economic growth, a reform plan that eliminates corporate tax expenditures in order to achieve revenue neutrality won’t stimulate any additional economic growth—in fact, it slightly decreases GDP.
If the point of tax reform is increased economic growth, which it should be, there is no reason to go through the heavy slog of tax reform and end up with a code that doesn’t meet that goal. Or, as the Tax Foundation found, “all the political pain of broadening the corporate tax base is for naught.”
It’s time for Republicans to abandon the false hope of revenue neutral tax reform, and to embrace tax reform as a true tax cut on the productive sector of the economy. Such a plan, the Tax Foundation found, would come close to paying for itself over the long term through an increase in real economic growth.