If done right, a package of badly needed changes to the tax code could jumpstart the American economy and give Republicans in Congress a long-overdue win.
This past Wednesday, President Trump kicked off his public push for tax reform with a visit to Missouri, where I live and work as an economics professor. While an affinity for tax cuts has long been a part of the Republican DNA, the stakes are higher now than they’ve ever been before.
The U.S. economy has been limping along for over a decade with depressed rates of small-business formation, millions of workers stuck outside the labor force, and over a trillion dollars in corporate cash parked overseas. While Trump has chosen to defer to Republican legislators on the details of tax reform, it is essential that he continues using the bully pulpit to pressure Congress into action. Another congressional failure after the recent Obamacare debacle would be unacceptable.
Now is not the time to play small ball, attempting to chalk up a political victory for its own sake. Republicans must seize this generational opportunity to craft bold tax reform that tilts the balance of power back from D.C. to the American people — tax reform that points the American economy back in a positive direction.
First, the IRS needs a new and more limited mission statement. For too long, politicians have viewed the tax code as a tool for undercover social engineering and for spending-by-disguise. Special-interest carve-outs and corporate welfare are not tax cuts, no matter how many times politicians claim otherwise. The appropriate goal for the tax code is far simpler: raising the necessary revenue to fund core government functions.
Second, tax reform must be about how we tax in addition to how much we tax. One of the centerpieces of the Republican argument for tax cuts is that they put more money in the hands of private citizens, who are better stewards of it than distant, unaccountable government bureaucrats. However, the siphoning of resources from the private sector to government only represents one of the damaging effects of our dysfunctional tax code. Equally bad for economic growth is how private resources get diverted from productive uses toward current behaviors incentivized by the tax code.
Too often, families and businesses make major economic decisions based on what is encouraged or discouraged by the tax code instead of on what is dictated by sound judgment and economic fundamentals. For example, our current tax code punishes marriage, risk-taking, and entrepreneurship while encouraging debt accumulation and monopoly-inducing mergers — hardly the recipe for a robust economy. This grim reality means that Republicans should refuse to settle for just any tax cut. Fixing the bad incentives in the tax code must be a top priority.
Tax reform must be about how we tax in addition to how much we tax.
Third, tax reform must aim for simplicity. As President Trump pointed out in his speech, the tax code now spans more than 2,600 pages, with over 100 pages of instructions alone. While big business can navigate this massive beast, families and small businesses, who are unable to afford an army of lawyers, can’t hope to do the same.
Fourth, Republicans must be the party of Main Street rather than Wall Street. Even as the unemployment rate has fallen to healthier levels, millions of workers are still out of the labor force, and wage growth has failed to notably improve. President Trump and congressional Republicans are right to seek lower taxes on investment income, but we must not lose sight of the fact that the most valuable assets most Americans have are their own skills and work experience. We must do all that we can to encourage people to invest in their own marketable skills and those of their families.
Fifth, the true burden of government is measured by its current and future spending, rather than by the amount we pay in taxes today. Tax cuts unaccompanied by spending restraint (whether now or later) entail more debt today and tax hikes tomorrow. While it’s true that economic growth greatly diminishes the budgetary impact of any sound tax cut, we must not shortsightedly think that we can cut taxes for free without also either shrinking the size of government or paying the piper down the road.
Sixth, Republicans must insist on permanent tax reform, rather than temporary patches and gimmickry. Despite the fast-paced world to which we have become accustomed, some of the most important decisions we make — raising a family, choosing a career, starting a business — typically involve long-term planning. Tax reform will have a much greater impact if it allows families and businesses to make decisions based on a fixed picture of their future tax burdens.
Finally, Republicans must take the social-justice fight to the Democrats. Liberals love discussions of “tax fairness” because it gives them a platform to divide Americans and to engage in class warfare. Democrats believe that collective society has a moral claim to every American’s income, and they would empower politicians to determine how much money somebody should be allowed to earn.
As most people care about equity in the tax code, Republicans must point out that liberals’ obsession with using the tax code for social engineering and redistribution is responsible for the very favoritism that currently exists in the tax code: big business over small business, cohabiting couples over married couples, and so on. Republicans must provide an alternative by standing for tax reform that creates a level playing field.
Following these principles, we can reclaim the American spirit from D.C. — and lay the groundwork for a national renaissance that will benefit all Americans in the generations to come.
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