Tax Reform to Encourage Growth, Reduce the Deficit and Promote Fairness

March 6, 2012

In testimony before the U.S. Senate Committee on the Budget, Daniel J. Mitchell, a senior fellow at the Cato Institute, said the internal revenue code is needlessly punitive and complex.  Some of its major flaws are:

  • High tax rates -- Marginal tax rates on additional increments of productive activity are too high, discouraging people from productive behavior.
  • Biased treatment of income that is saved and invested -- Because of the capital gains tax, the corporate income tax, the double tax on dividends and the death tax, there is pervasive double taxation on capital, causing very high effective marginal tax rates.
  • Distorting loopholes -- Many provisions of the internal revenue code are explicitly designed to encourage economically irrational choices.
  • Worldwide application -- The United States has the world's most onerous tax system for international activity.
  • Corruption -- While in most cases technically legal, the common practice of swapping favorable tax policies for political support is corrosive.
  • Complexity -- Nearly 100 years of tax changes have produced 72,000 pages of law and accompanying regulation.

Tax reform has the potential to reduce, or perhaps even eliminate, these problems.  But it also could make them worse.  To ensure the best possible outcome, lawmakers should be guided by these principles.

  • Tax rates should be as low as possible -- Taxes are a price, and it doesn't make sense to impose a high price of work and entrepreneurship.
  • The tax system should not discriminate against capital formation -- Since every economic theory, even Marxism and socialism, holds that saving and investment are key to long-run growth and higher living standards, it doesn't make sense to impose extra-high tax rates on capital.
  • Government should not tilt the playing field with preferences or penalties -- Luring people into making economically inefficient choices makes the economy less productive.
  • Territorial taxation -- This is the good-fences-makes-good-neighbors approach to tax policy. Disputes with other nations become trivial if each nation is in charge of taxing economic activity inside its borders.

Source: Daniel J. Mitchell, "Tax Reform to Encourage Growth, Reduce the Deficit and Promote Fairness," Cato Institute, March 1, 2012.

For text:

http://www.cato.org/publications/congressional-testimony/tax-reform-encourage-growth-reduce-deficit-promote-fairness

 

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