U.S. NEEDS TAX REFORM: DONE RIGHT
It is very encouraging that Congress is moving on tax reform. It has been more than 30 years since there were major reforms to United States taxes. A lot has changed since then, and the American people deserve a modern tax system for a modern economy. Yet, there is room for improvement in the current legislation being considered.
Before Congress completes its work on taxes, steps must be taken to ensure that genuine reform is achieved that truly helps the economy and does not make our already unsustainable national debt outlook worse. Fortunately, such a path has already been blazed.
The primary goal of this tax effort is to grow the economy. This is a worthy objective. Stronger economic growth will improve the quality of life for families in Tennessee and across the country.
However, lawmakers must rectify a critical shortcoming in the current legislation to enable it to unleash lasting growth. As currently written, the tax cuts would increase deficits by about $1.5 trillion over a decade. More than $2 trillion will be added to the debt counting the gimmicks intended to hide the true cost, as well as the added interest.
This is simply not acceptable because the debt is already on an unsustainable course. The debt recently surpassed $20 trillion and is climbing steadily. Spending and revenue are already so out of balance that the debt is expected to grow by $10 trillion more over the next 10 years even before any tax cuts are included.
Yes, significant spending cuts will be required to stabilize the nation’s balance sheet. But if we corrode revenue further, the spending reductions required will be so severe that many voters will balk, and it will be much more difficult for the political system to meet the challenge.
Even if tax cuts provide a brief economic boost in the short term, high and rising national debt will eventually slow growth. The increased government borrowing to service the debt will cause interest rates to rise, which will crowd out the private investment needed to fuel job and wage growth. In the end, this will likely more than negate any positive effects of tax cuts.
Although some claim tax cuts will pay for themselves by generating increased revenue through more robust growth, the historical and economic evidence casts serious doubt on this notion. Even the most optimistic models from independent observers indicate that debt will increase.
Tax reform done right can indeed produce palpable economic gains. Nonetheless, overselling tax cuts is very dangerous. Simply cutting tax rates and increasing the debt will open the door for massive tax increases down the road to balance the budget, which could cripple the economy.
There is also a serious moral obligation at stake. Tax cuts that add to the debt are really just a future tax on those who succeed us. Making our children pay for our tax cuts through higher debt goes directly against the great American ideal of leaving the next generation better off.
So, how do we maximize the economic benefits of tax reform? We simply have to look at the past for guidance.
I served in the administration of Ronald Reagan the last time tax reform was accomplished in 1986. A pillar of that effort was that reform not add to the debt.
That goal was attained by addressing many of the tax loopholes of the time. Reforming those tax preferences created the space to lower tax rates without increasing the debt.
Since the last reform, many new tax breaks have found their way into the tax code. Eliminating or limiting them will allow tax reform to be done in a fiscally responsible way.
Congress has an opportunity to write a new chapter of America’s economic story. In doing so, it should take a page from Ronald Reagan and undertake comprehensive tax reform. That is the best way to create a happy ending for current and future taxpayers.
Bill Brock is a former U.S. secretary of labor. He served as a U.S. senator from Tennessee (1971-1977). Before that, he represented Tennessee’s 3rd Congressional District in the U.S. House of Representatives. He is a member of the Congressional Fiscal Leadership Council of the Campaign to Fix the Debt.