Some observers were quick to conclude that the New Year’s Eve fiscal cliff agreement “killed” tax reform for 2013. It’s certainly true that President Obama’s insistence on a tax rate hike as the price for preventing trillions of dollars in tax increases on all Americans was a huge missed opportunity. But reports of the death of tax reform are greatly exaggerated. As a new member of the Senate Finance Committee, I am confident that an overhaul of our broken tax system remains not only doable but essential for job creation and economic growth.
For all its defects, the fiscal cliff agreement actually made tax reform easier to achieve by making tax rates permanent. Since 2001, taxes on everything from salaries and small business income to investment earnings and gifts have been temporary — a source of economic uncertainty and perennial fiscal fights. New permanent rates create a clear starting point for tax reform and end disputes over the baseline that have vexed past reform attempts.
Nor did the agreement in any way blunt the momentum for tax reform. There is a broad and growing consensus that our tax system is plagued by excessively high rates on business and labor income, a complex maze of tax preferences, and an outdated approach to American businesses competing for customers abroad. The cliff deal did nothing to solve those problems and in some areas worsened them. The pressure for tax reform is strong as ever.
But far more important than why tax reform can happen this year is why it should happen: our tax code has become an obstacle to growth, and only a robust, growing economy can create the new jobs (and future tax revenues) that we need.
Today, three years into the weakest recovery on record, the American economy is still sputtering. Twenty million people are jobless or underemployed, and fewer jobs were created last year than the year before. Median family income is at its lowest level since 1995.
Taking a larger tax slice out of a shrinking economic pie is not the way to spur job creation or erase the government’s trillion-dollar deficits. The solution is to grow the pie — to unleash the forces of economic growth and job creation. And there is no better way to do that than through structural spending reforms to boost confidence in America’s long-term fiscal solvency, paired with reform of our tax code to promote growth, investment, and entrepreneurship.
Our tax code has become a drag on the economy. Excessive tax rates on business income decrease the incentive to build and invest in the United States and put American workers at a competitive disadvantage. As the Organization for Economic Development and Cooperation has reported, high corporate tax burdens are “most harmful to growth.” Yet as our major trading partners have slashed their rates to attract jobs, the U.S. corporate rate last year became the highest among our 33 major industrialized competitors. One study in the Journal of Public Economics showed that a 10-point rate cut could increase economic growth by 1-2 percentage points — which translates to about a million new jobs per year.
Meanwhile, our tax code has become a tool for picking winner and losers. Hundreds of federal tax preferences — for everything from Hollywood film shoots to algae growers — distort economic decisions and misallocate capital. This tax favoritism allows some to avoid paying their share and rewards interests armed with expensive tax lawyers and lobbyists. It’s time to clean it up.
The good news is that tax reform can kill two birds with one stone. Just as President Reagan and Democrats and Republicans in Congress did in 1986, we can cap or eliminate inefficient tax preferences and loopholes and use that revenue to reduce both the corporate and individual tax rates without adding a dime to the deficit.
Tax reform should not be short-sighted revenue grab but rather an opportunity to promote long-term economic growth – which will lead to more revenue. The Simpson-Bowles Commission, the President’s Jobs Council, and the Treasury Department have all called for using the revenue raised from broadening the tax bases to cut rates. We should hold firm to that bipartisan principle of deficit-neutrality on both the corporate and individual side in the upcoming tax reform process.
Finally, tax reform would be incomplete if we fail to modernize our 1960s-era approach to international taxation. The U.S. system of worldwide taxation with permanent deferral puts U.S.-headquartered businesses and workers at a disadvantage, and it creates an powerful incentive for firms to keep their foreign profits outside the U.S. — more than $1.7 trillion by recent estimates. The solution is to eliminate the penalty on bringing home foreign earnings as our competitors have done, while strengthening measures to prevent artificial sourcing of income to low-tax countries. By creating a level playing field for American businesses seeking new customers overseas, we will see greater output and job creation in the United States.
The president and the new Congress have an opportunity to do something big and bipartisan on tax reform, if we remain focused on the goal of job creation. Tax reform done right is a surefire way to boost U.S. competitiveness and reduce the deficit through growth. Let’s get to work.