Policy Report

Government growth negatively correlates with economic success. By every conceivable measure, the U.S. government has grown larger than ever and almost certainly larger than necessary. A simple, transparent tax code would restrain the growth of government by allowing taxpayers to make rational cost-benefit decisions based on the price they are paying for government.

Discriminatory taxation of the married-couple family is neither equitable nor economically efficient, and comes at an enormous social cost. Married-couple families bear a disproportionate share of the tax burden, resulting in stagnation of their incomes. Reform of the marriage tax penalty is not enough. A neutral consumption tax would correct all of the discriminatory measures against the family and would support higher real incomes for all Americans.

Progressive taxation was designed to reduce income disparity by disproportionately taxing upper incomes and redistributing the proceeds through the welfare state. However, over the four decades, while the share of income taxes levied on the upper tenth of incomes rose 15 percentage points, the after tax income share of the remainder of incomes declined 13 percentage points. Progressive taxation has failed to reduce the disparity of real incomes.

The solution to looming Social Security shortfalls is increased economic growth. Personal retirement accounts, owned by workers and invested in real assets, would prefund benefits and could provide new saving and investment critical to economic growth, provided that tax reform makes saving and investment in the U.S. more attractive. Thus the path to Social Security reform is through tax reform.

Complying with the current income tax code costs Americans 3 million person-years each year. This represents a deadweight loss to the economy and resources that could have been spent on otherwise productive efforts. The chief source of federal tax complexity is the income tax. Substantial reform can come only from replacing the income tax system with a consumption-based system such as the flat tax, a national retail sales tax, or a consumed income tax.

Our current tax system puts U.S. companies at a disadvantage in their efforts to compete internationally. Remedies thus far have been a hodgepodge of international tax rules that often operate at cross-purposes, create perverse incentives, and incur the ire of international trade organizations. A reformed tax code including territorial taxation would better serve the vital interests of the United States.

Tax reform should encourage investment in physical capital through expensing, and it should encourage investment in human capital through expensing as well. Tax reform will also remedy other areas of the tax code such as high marginal tax rates and progressive taxation that discourage people from acquiring extra skills and punish them as they deploy their talents and abilities—their human capital.

Advocates for tax reform must confront the current tax subsidy for employer-based health insurance, which distorts the market for private health insurance and penalizes those who do not obtain health insurance through an employer. The current scheme should be changed to a straightforward system of credits to empower individuals to make their own health care choices. This would eliminate the current discrimination and tear down this barrier to fundamental tax reform.

Americans suffer from an assault on their privacy because of the way our tax code taxes income. Fundamental tax reform is the key to redressing this invasion of privacy, but proposed international “information exchange” rules would undermine any potential for tax reform and privacy protection. These new rules should be opposed, and tax reform pursued, to protect the privacy of American taxpayers.

A significant problem of the U.S. tax code is that it discourages saving and investment critical to economic growth. Fundamental tax reform toward greater reliance on consumption taxes would increase national saving, reduce the cost of capital, and lead to higher levels of capital formation and GDP. Such a move would be an important policy lever for achieving stronger economic growth, higher living standards, and greater national security.