To­ward a tax sys­tem de­signed on pur­pose

Re­form is es­sen­tial to unleashing pros­per­ity

The Washington Times Daily - - OPINION - By Ed Feul­ner Ed Feul­ner is founder of the Her­itage Foun­da­tion (her­itage.org).

Job No. 1 for Congress, as I noted in a re­cent col­umn, is re­peal­ing Oba­macare. But cut­ting taxes is a close sec­ond. Of course, the whole sys­tem needs an over­haul. We want to un­leash eco­nomic growth and pros­per­ity. Tax cuts are a cru­cial first step to­ward that, but we need full re­form to get us across the fin­ish line.

U.S. tax rates, sim­ply put, are too high. Com­bined mar­ginal rates for some in­di­vid­u­als and cap­i­tal in­vest­ments can ex­ceed 50 per­cent, tax ex­perts Romina Boc­cia and Adam Michel note in a re­cent pa­per.

Our busi­ness tax sys­tem is par­tic­u­larly bad. Amer­i­can cor­po­ra­tions face one of the high­est tax rates in the world. They also must grap­ple with one of the worst sys­tems for busi­ness de­duc­tions of in­vest­ment ex­penses.

Some Amer­i­cans may hear that and think, well, big deal. Those big com­pa­nies can af­ford it. And how does it re­ally af­fect me? Very di­rectly: 70 per­cent of all busi­ness taxes end up be­ing paid by work­ers through lower wages.

Re­mem­ber, we’re all in the same econ­omy. Higher mar­ginal tax rates dis­cour­age ad­di­tional work. They cur­tail en­trepreneur­ship. They re­duce sav­ings and in­vest­ment. That slows eco­nomic growth as a whole, and that af­fects all of us.

Or take busi­ness de­duc­tions. But not al­low­ing the de­duc­tions of all ex­penses in the year they are in­curred, Ms. Boc­cia and Mr. Michel point out, the tax code makes it more ex­pen­sive for com­pa­nies to in­vest. In­vestors wind up with lower re­turns. That im­pedes wage growth and slows job creation.

The prob­lem is, we have a tax sys­tem so in­cred­i­bly com­plex that even the peo­ple in charge of en­forc­ing it can’t al­ways agree on what it means. It’s loaded with so many ex­emp­tions, de­duc­tions, ex­clu­sions and other com­plex­i­ties that many Amer­i­cans are afraid to pre­pare their own tax re­turns.

We need, as the say­ing goes, a tax sys­tem that looks like it was de­signed on pur­pose. One that is as trans­par­ent and sim­ple as pos­si­ble. That is why I and other con­ser­va­tives have of­ten urged the adop­tion of a flat tax, which would en­able Amer­i­cans to fig­ure out ex­actly what they owe in min­utes and with con­fi­dence.

Trea­sury Sec­re­tary Steve Mnuchin seems to agree. “We are go­ing to sim­plify per­sonal taxes where 95 per­cent of Amer­i­cans will be able to fill out their tax re­turn on a large post­card,” he re­cently said. “You can imag­ine how that makes things easier for them and easier for us at the IRS.”

Yet some law­mak­ers ob­ject to ma­jor tax re­form. They re­coil at the very thought of tax cuts. They in­sist we can’t af­ford it — that cuts would have to be “paid for” by find­ing new rev­enue streams for our deficit-laden fed­eral gov­ern­ment.

Wrong. Deficits are the re­sult of a spend­ing prob­lem, not a rev­enue prob­lem.

“Re­form­ing the tax code should not re­quire find­ing new rev­enue sources,” Ms. Boc­cia and Mr. Michel write. “Per­sis­tent deficits are the re­sult of un­con­trolled spend­ing, not in­suf­fi­cient tax­a­tion. With­out spend­ing-based re­forms, deficits will con­tinue to grow, re­quir­ing still higher taxes in the fu­ture.”

That’s why true tax re­form must com­bine the right cuts in tax rates with the right cuts in spend­ing. In­deed, it’s the only way to put the fed­eral bud­get on a sus­tain­able path. Fo­cus­ing only on one side of the bud­get ledger would be a ma­jor mis­take.

Un­for­tu­nately, pro-growth tax re­form will face an up­hill bat­tle in the Se­nate, where a 60-vote thresh­old is nec­es­sary for pas­sage. Re­form-minded law­mak­ers would be bet­ter off us­ing the bud­get rec­on­cil­i­a­tion process, which would put their ef­forts on a fast track and limit need­less de­lays. In­stead of need­ing 60 votes to break a po­lit­i­cally mo­ti­vated fili­buster, a sim­ple ma­jor­ity is all that would be re­quired.

“We will have suc­cess,” said Mr. Mnuchin. “This is a pass/fail ex­er­cise, and we will pass tax re­form, pe­riod.” For the sake of all tax­pay­ers, let’s hope he’s right.

True tax re­form must com­bine the right cuts in tax rates with the right cuts in spend­ing. In­deed, it’s the only way to put the fed­eral bud­get on a sus­tain­able path.

IL­LUS­TRA­TION BY HUNTER

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