Redefining the Goal of Tax Reform

November 18, 2013

Tax reform is in the air in Washington these days. It may take time to come to fruition, but there is growing bipartisan agreement that the tax code is too complicated, burdensome and uncompetitive, and is undermining our economic potential, says Scott A. Hodge, president of the Tax Foundation.

The goal of tax reform is not just to design a simpler tax code but a code that promotes economic growth and ultimately raises the standard of living for every American. To members of Congress, it's about balancing the needs of some interest groups over others. Instead, it should be about helping the American people grow the economy.

  • For example, before we reform the income tax code, we need to know who pays income taxes and who doesn't.
  • We also need to be aware of the demographic changes happening in America -- such as the aging population -- because today's taxpayers are likely very different from yesterday's taxpayers.

Before we simplify the tax code, we need to know who benefits from the current tangle of credits and deductions. We then need to understand the economic effects of eliminating these so-called tax expenditures and whether we would be better off trading them for lower tax rates. If inequality and progressivity are a concern, we need to know how progressive the current tax system is and how it works with spending to redistribute income from some Americans to others.

  • Corporate tax reform is a must because America now has the highest corporate income tax rate in the industrialized world and it deters investment. But before we reform the corporate tax code, we need to understand that America is an entrepreneurial economy.
  • We have more than 30 million businesses paying taxes under the individual tax system compared to 1.7 million paying taxes under the traditional corporate tax code.

Ideally, a tax code should do only one thing: raise sufficient revenues to fund the size of government people want in the least economically harmful manner possible. Our system is far from that ideal and may never be perfect. Perhaps, if lawmakers and citizens are armed with the facts, we can have an honest debate and move toward a tax code that leads us to a more prosperous America.

Source: Scott A. Hodge, "Putting a Face on America's Tax Returns: A Chart Book," Tax Foundation, October 21, 2013.

 

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