Tax Reform Is the Swiftest Path to Growth
'What is tax reform?"</br></br>That's the Jeopardy-like question matching the answer: "The best step the government could take now to promote growth and employment." The Obama administration has been responding with "What are higher marginal tax rates and more stimulus?" But fundamental tax reform offers three key benefits.</br></br>First, reducing marginal tax rates on saving and investment and on work and entrepreneurship will increase capital formation and productivity, raising wages and output. Broadening the tax base and sharply lowering marginal tax rates can raise gross-domestic-product growth by a half to a full percentage point per year over a decade, according to an analysis of U.S. tax policy by economists Alan Auerbach and Kevin Hassett. A sustained economic expansion will reduce America's high rate of joblessness.</br></br>Second, tax reform is part of the structural reform the economy needs. Our economic woes trace in part to an economy overly dependent on consumption and government. Removing these imbalances requires a reorientation toward investment and exports. Tax reform, by reducing or eliminating the double taxation of corporate equity and offering incentives for new business investment, will accelerate the economy's needed turn to investment. And lower business tax burdens increase U.S. competitiveness in exports and trade.</br></br>Third, tax reform is a necessary precondition for any serious national discussion of long-term deficit reduction. President Obama's repeated calls to raise marginal tax rates on upper-income Americans call to mind the image of a dog chasing a car, then stopping to wonder what to do with it when he catches it. The near-term price of a presidential victory here would be lower growth and employment. Over the longer term, the president could not hope to raise sufficient revenue from the present tax system to fund his proposed federal spending share of GDP of 25% or more. I raise this observation not to advocate raising taxes, but to note that we cannot have a serious conversation about "taxes" versus "spending" -- with an eye toward a larger state -- without tax reform.