10 tax reform options that would boost the economy

So what should Congress do if it wants to boost economic growth? There are many ideas, but here are 10 options that focus on tax reform. All of the ideas come from the Tax Foundation’s new book, Options for Reforming America’s Tax Code, which analyzes 86 tax reform ideas and their effects on economic growth and the federal budget.

Option 1

Reduce the corporate income tax to 25 percent and allow all businesses to fully expense capital investments. These reforms would boost GDP by 6.6 percent over a decade, creating 1.2 million jobs. The bottom 20 percent of income-earners would see their post-tax income rise by 5.9 percent, while the top 20 percent would get a 6.5 percent raise. The federal budget, however, would take a hit, with a $1.2 trillion revenue decrease over the next decade, even accounting for the reforms’ economic benefits.

Option 2

Replace the corporate income tax with a value-added tax, a type of consumption tax. Interestingly, this option would actually be a net tax increase, but still grow the economy. This option would increase the economy by 5.5 percent over roughly 10 years, creating 337,000 jobs. The Tax Foundation says the economic growth occurs despite the tax hike “because value-added taxes allow businesses to deduct the full cost of investment … significantly reduc[ing] the cost of capital.”

By a static estimate, which doesn’t account for economic growth, the switch to a value-added tax would raise federal revenue by $1.5 trillion over a decade. Once the economic effects are accounted for, though, revenue would rise by $3.2 trillion over a decade. The change would help the top 20 percent of income earners most, boosting their post-tax income by 2.5 percent. But every income group would still benefit, with the lowest 10 percent of income earners still seeing a 1.9 percent raise in post-tax income.

Option 3

Allow full expensing of capital investments. This change would boost GDP by 5.4 percent over roughly 10 years, creating 1 million jobs. The bottom 20 percent of income-earners would see their post-tax income rise by 4.9 percent, while the top 20 percent would get a 5.4 percent raise. The federal budget would lose $881 billion over a decade, after accounting for the resulting economic growth.

Option 4

Lower the top corporate income tax rate to 15 percent. This would raise GDP by 4.3 percent over about 10 years, creating 824,000 jobs. Federal revenue would decline by almost $1 trillion over a decade, even after accounting for the economic growth. But that number doesn’t include any earnings that corporations would keep in the United States because of the lower tax burden, rather than shifting it abroad. The bottom 20 percent of income-earners would see their after-tax income rise by almost 4 percent, with the top 20 percent of income-earners getting a slightly higher raise.

Option 5

Lower the top corporate income tax rate to 20 percent. This option has a portion of the economic and job benefits that option four has, but doesn’t lose as much federal revenue. Instead of 4.3 percent GDP growth over a decade, the 20 percent top corporate rate would raise GDP by 3.3 percent. Instead of 824,000 jobs, this option would create 641,000 jobs. Most income-earners would see their post-tax incomes rise by 3 percent instead of 4 percent. The federal budget would lose $718 billion over 10 years instead of nearly $1 trillion, but corporations would be more likely to shift more of their profits abroad under option five.

Option 6

Integrate the corporate and individual tax systems by allowing corporations to deduct dividends paid. Corporate income is double-taxed in the U.S. through the corporate income tax, then again on shareholders through the individual income tax on dividends. Instead of double-taxing that income, the tax code could integrate the two, creating an economic boost of 2.9 percent over about 10 years and creating 535,000 jobs. Eliminating the double-tax would cut federal revenue, however, by $1.1 trillion over 10 years. This is a rare instance of a tax cut that helps lower-income earners more than high-earners. The bottom 20 percent of the income distribution would see their post-tax incomes rise by 2.7 percent, while the top would only get a 1.4 percent rise.

Option 7

Eliminate taxes on long-term capital gains and certain dividends. Currently, these types of incomes are taxed at a lower rate than regular income, like wages or interest. But taxing these types of incomes at all is a form of double-taxation. Eliminating their taxation would boost the economy by 2.7 percent over the next decade, with 525,000 jobs created. It would cost the Treasury almost $1 trillion over 10 years, however, even after accounting for the economic boost. The tax change would also disproportionately benefit high-earners, with the bottom 20 percent getting a 2.4 percent raise compared to a 4.8 percent raise for the top 20 percent.

Option 8

Lower the top corporate rate to 25 percent. Remember how option 4 was like a limited version of option 5? The same applies here. The economy would grow by 2.3 percentage points over about a decade, creating 443,000 jobs. The treasury would lose $459 billion over a decade, even after accounting for the economic boost. Everyone, from low-earners to high-earners, would see a post-tax income raise slightly higher than 2 percent.

Option 9

Move to a flat individual income tax rate of 20 percent. If you’ve been waiting for the individual income tax, the federal government’s biggest source of revenue, to show up in these options, wait no more. This option would get rid of all individual income tax deductions and credits, as well as the alternative minimum tax, and tax all individual income at 20 percent. The long-run boost in GDP would be about 2.2 percent. While the economic growth would be small relative to the eight options above, a whopping 1.3 million jobs would be created. The best part is, the effect on the budget is only a $99 billion decrease in tax revenue over 10 years, after the economic growth is accounted for. That’s the closest any tax cut option listed here gets to being fully paid for, and it would be relatively easy to find spending cuts to offset the lost revenue. But the tax would have some weird effects on inequality. The bottom 20 percent of the income spectrum would see their post-tax incomes rise by 1.8 percent. The second 20 percent would see almost no change. The middle 20 percent and second-highest 20 percent would actually see their incomes drop by a little more than 2 percent. Then the top 20 percent would see a big raise: 5.8 percent.

Option 10

Lower marginal income tax rates across the board by 20 percent. Again, messing with the individual income tax can have some interesting effects. Economic growth under this option would rise by 2.1 percent over about a decade. That’s the most meager growth of any option listed here, but it would create the most jobs: 1.8 million. Those jobs don’t come cheap, though: Federal revenue would decline by $3.5 trillion over 10 years, even after you account for the economic growth and job creation. The reform might also increase income inequality, although every income group benefits: The bottom 20 percent would see a 1.9 percent raise in their incomes, while every other group of higher-earners would see a bigger raise, with 6.4 percent for the top 20 percent.

Jason Russell is a commentary writer for the Washington Examiner.