When Republicans take control of the House of Representatives in January, their tax writers should shift time and attention away from raising taxes to reforming taxes.
With concerns growing over a likely recession next year, a pro-growth tax reform plan would be the best policy response. One tax reform plan worth looking at was just released by the American Enterprise Institute. The AEI plan would broaden the tax base and reduce rates, along the lines of the successful Reagan tax reforms. The AEI authors say their proposal would eliminate the tax on new investment, reduce the incentives to shift jobs abroad, and make U.S. businesses more competitive internationally. The plan would also intend to be fiscally responsible, keeping federal revenue at current service levels by repealing tax deductions and credits to offset the cost of the proposed tax reductions.
One key element involves reducing the corporate tax rate to 15%. Under current law, U.S. businesses pay a combined average federal-state tax rate of 25.8%, a rate higher than the average OECD rate of 23.4%. Over the last few years, most of the world’s most advanced economies, our leading competitors, have reduced their corporate rates after studies have shown a high corporate rate is the most damaging to economic growth. Most of the 35 OECD countries now have corporate rates lower than the U.S. rate. A lower U.S. rate would increase incentives for investment and corresponding productivity. It would make the U.S. more competitive around the world. It would provide substantial relief to small businesses, and lead to more jobs, higher wages, and lower prices.
House tax writers should begin the reform process as soon as possible. With a global economic slowdown looming, Congress should focus on taking steps to increase economic growth. A revenue-neutral tax reform plan would be the best way to get the economy moving again.
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Bruce Thompson was a U.S. Senate aide, assistant secretary of Treasury for legislative affairs, and the director of government relations for Merrill Lynch for 22 years.
