[This is the eighth installment of a blog series Tom is writing on the national debt crisis. They all can be seen here. Related, see also our signature on these two open letters. – CZ]
The Committee for a Responsible Federal Budget (CRFB) describes the sheer size of the federal tax code as “several volumes longer than the Bible.” Such a complicated mess imposes needless costs upon both businesses and individuals. A simplified system, with lower marginal rates but fewer deductions and loopholes, would ease the tax preparation burden for taxpayers. More important, it would boost domestic investment and generate revenues through economic growth.
Tax reform should be part of the next phase of deficit reduction. The Joint Select Committee -- the "Super Committee" -- created by this weekend's agreement on the debt ceiling should include tax reform in its report to Congress. It would be good for taxpayers; it would be good for the economy; it could pass!
In fact, the CRFB’s proposal for tax simplification has garnered support from legislators and policy makers on both sides of the aisle, and many of the suggested adjustments to the tax code have been included in the Bowles-Simpson Commission Report, the “Gang of Six” plan, and the tentative-but-unrealized “big plan” considered by President Obama and Speaker Boehner.
The total cost of tax breaks and loopholes is roughly $1.1 trillion per year. In 2009, those “tax earmarks” totaled more than the entire amount of actual revenue generated by individual income taxes. Under the CRFB’s “Modified Zero Plan,” many earmarks would be eliminated, but some of the most important ones, such as the child tax credit and the Earned Income Tax Credit, would be retained. This would allow for marginal tax rates to be significantly lowered without getting rid of the vital support mechanisms that help families make ends meet. But even with lower rates, the projected impact of the plan would actually be an increase in revenues to the tune of $800 billion over ten years.
The Modified Zero Plan also calls for the United States to improve it competitiveness by 1) cutting the corporate tax rate, the second highest in the world, and 2) shifting to a “competitive territorial system” that would erase the incentives for American companies to keep their overseas profits outside of the US. These steps would bring hundreds of billions home for domestic investment, rather than encouraging our own corporations to continuously recycle their revenues abroad. It would also encourage companies to invest here, create jobs here, and export products and services to other countries. That means GROWTH, and economic growth has a predictable side affect: it generates more funds for the government.
While making responsible cuts to the federal budget is a necessary and important step in righting America’s fiscal ship, the best way to overcome this debt crisis is through growth, and the best way for the government to support growth is to encourage investment and job creation. Major tax reform is one way to do that. It must be part of any plan to resolve our debt problem.