I have been criticizing the Republican Congress lately for straying from fundamentals in attempting to reform healthcare and tax policy. What are the fundamentals for tax reform? In my opinion they are:
- Faster economic growth. The economy has averaged only 2% annual growth since the end of the Great Recession in June 2009. The unemployment rate has slowly fallen to the current 4.4% level and a labor shortage is now developing. But wage gains for the broad middle class and especially blue collar workers have been minimal. Faster growth will put pressure on employers to raise wages faster to acquire the skilled workers they need.
- Revenue neutrality. With the public debt (on which we pay interest) now 77% of GDP, the highest since the end of WWII, and predicted by the Congressional Budget Office to keep getting steadily worse without major changes in policy, it would be the height of irresponsibility for Congress to approve tax changes which increase our annual deficits.
Given these two basic principles, what should be the specific changes made to tax law? Here are my priorities:
- Lowering the corporate tax rate from its current level of 35% to a competitive level, approximately 20%, with other developed countries. This would be a huge incentive for our multinational corporations to bring their foreign profits back home.
- Full expensing for business investment is allowed, replacing depreciation over a period of years, to speed up new investment.
- Simplification of the rules for individuals, such as with fewer tax rates and fewer credits, so that fewer errors will be made and a greater proportion of true tax liabilities will be collected.
- Create revenue neutrality for the above tax rate cuts by eliminating, or at least shrinking, many deductions and closing loopholes.
Conclusion. Tax reform will be highly beneficial for the economy if it is done correctly. This means ignoring many of the special interest provisions which have also been suggested for conclusion. I will discuss these in my next post.