Four veterans of some of America’s greatest tax reform successes spoke at Heritage on October 21 about lessons to be learned from those legislative victories. Richard Rahn, Mark Bloomfield, Dan Mitchell, and Heritage’s Steve Moore shared some key insights from the reforms of 1978, 1981, and 1986 that may once again put lawmakers on the path to improving our tax code. Their advice could not come at a better time.
As the 114th Congress prepares to take office and develop a legislative agenda for the next two years, fundamental tax reform should be a top priority. At 39 percent, the U.S. has the highest corporate tax rate in the developed world. To make matters worse, our policy of worldwide taxation means that the Treasury taxes U.S. businesses not only on income earned domestically, but also on income earned overseas. The U.S. is the only major industrialized nation that continues to do this. In a globalized marketplace, where cross-border capital and investment flows are highly fluid, these measures impose heavy costs on American companies, thereby placing them at a competitive disadvantage, encouraging re-incorporation in more tax-friendly domiciles, and making them attractive targets for foreign companies seeking to acquire them.
The problems don’t end there. America’s tax laws are biased against savings and investment, the activities that fuel economic growth. Moreover, the tax code is riddled with preferences and loopholes that misallocate resources and increase the share of the tax burden borne by working families. Experts agree that our current system is broken, antiquated, and in desperate need of overhaul.
Tax reform, though, can be notoriously difficult to achieve. It is politically divisive, and powerful interests are arrayed against it in favor of the status quo. How can we overcome these barriers and enact meaningful reform?
The panel at Heritage offered three critical lessons that may help:
- Go big and go bold. Lawmakers shouldn’t waste their time advocating incremental or marginal reforms. We should instead push for sweeping, dramatic changes—large cuts in corporate tax rates, movement toward a territorial system, and significant widening of the tax base. These kinds of revolutionary changes are more likely to bring about real results. Revolutionary reforms in the tax system will also appeal to the public, which views our existing tax code as profoundly corrupt.
- Institutional reform is a prerequisite. The Joint Committee on Taxation desperately needs to abandon static scoring in favor of dynamic scoring. In calculating the effects of various tax policies on revenue flows, static scoring completely ignores the impact of economic growth. Lower marginal tax rates over the long term result in this growth, which translates to higher taxable incomes and hence greater revenue. By failing to account for this, static scoring consistently underestimates the long-term impact of tax rate reductions on revenue and creates an institutional bias against tax rate reductions and in favor of tax increases.
- Fairness is paramount to voters. Voters don’t just care about how tax policy affects them—how it affects them relative to others is just as important. In other words, a tax cut that benefits everyone may not be popular if it is perceived as benefitting certain groups disproportionately. Like the reforms under Reagan in 1986, coupling marginal rate cuts with an overhaul of existing preferences would help accomplish this. This would also help root out some of the inefficiencies that plague our tax policies.
David Allen is currently a member of the Young Leaders Program at The Heritage Foundation. For more information on interning at Heritage, please click here.
