The Corner

Tax Reform Is about Economic Growth

For weeks now, the debate on tax reform has been bogged down by a Tax Policy Center (TPC) analysis that concluded, incorrectly, that Mitt Romney’s tax reform plan would “mathematically necessitate” a tax increase on the middle class.

I detailed the errors in TPC’s analysis and showed how Romney’s plan doesn’t raise taxes on the middle class here. Others have exposed flaws in the TPC analysis as well.

Amid the back-and-forth necessary to set the record straight, the debate lost focus on why tax reform really matters. As Vice President Joe Biden and House Budget Committee chairman Paul Ryan (R., Wis.) prepare to debate tonight, now is a good time to step back and remember the purpose of tax reform: to overcome a lackluster recovery and revitalize economic growth. 

Tax reform encourages growth by removing the barriers to engaging in productive activities: working, saving, investing, and taking on risk. It does this by lowering marginal tax rates on income, eliminating distortionary incentives in the tax code that misdirect the nation’s resources to less productive activities, and by reducing — or better yet, eliminating — the general tax bias against saving and investment.

True tax reform makes these improvements while ensuring the new tax code raises the same amount of revenue as the current code, it is revenue neutral. It achieves lower tax rates and revenue neutrality by broadening the tax base. Tax reform should also be distributionally neutral, meaning it does not systematically shift the tax burden from one group of taxpayers to another.

Romney’s plan follows this model. To strengthen economic growth, it reduces all marginal tax rates by 20 percent and eliminates taxes on saving and investment for incomes below $200,000. It also abolishes the death tax and the Alternative Minimum Tax (AMT) to spur growth further.

Romney has said he’d work with Congress to broaden the base to make his reform revenue neutral and to ensure it doesn’t shift the existing tax burden.

Stronger economic growth is the reason many policymakers propose to reform taxes. Ryan, as Chairman of the House Budget Committee, proposed such a plan. So did Senator Ron Wyden (D., Ore.), along with Senator Dan Coats (R., Ind.). So did the president’s own Simpson-Bowles Commission. There is bipartisan recognition that we need tax reform to improve the economy.

If Congress adopted a sound approach to tax reform, the economy would be stronger going forward. More Americans would be employed, and wages would be higher. Tax reform is one of the many policy improvements Washington should make in order to improve the prospect for American workers.

This is why tax reform is so vital today. It is important to keep this fact that in mind during tonight’s debate and going forward in 2013.

 Curtis Dubay is the senior tax policy analyst at The Heritage Foundation’s Roe Institute for Economic Policy Studies.

Most Popular

U.S.

How to Bend the News

This, from ABC, is a nice example of a news organization deliberately bending the truth in order to advance a narrative that it wishes were true but is not: Venerable gun manufacturer Colt says it will stop producing the AR-15, among other rifles, for the consumer market in the wake of many recent mass ... Read More
Education

George Packer Gets Mugged by Reality

Few journalists are as respected by, and respectable to, liberals as The Atlantic’s George Packer. The author of The Assassin's Gate (2005), The Unwinding (2013), and a recently published biography of Richard Holbrooke, Our Man, Packer has written for bastions of liberal thought from the New York Times Magazine ... Read More
U.S.

Trump’s Total Culture War

 Donald Trump is waging a nonstop, all-encompassing war against progressive culture, in magnitude analogous to what 19th-century Germans once called a Kulturkampf. As a result, not even former president George W. Bush has incurred the degree of hatred from the left that is now directed at Trump. For most of ... Read More
World

Iran’s Act of War

Last weekend’s drone raid on the Saudi oil fields, along with the Israeli elections, opens a new chapter in Middle Eastern relations. Whether the attack on Saudi oil production, which has temporarily stopped more than half of it, was launched by Iranian-sponsored Yemeni Houthis or by the Iranians themselves is ... Read More