The U.S. Needs Tax Reform....And a Big Tax Cut

Does the U.S. need tax reform? It most certainly does. But there’s more. The U.S. also needs a big tax cut.

Republicans love talking about the achievements of President Ronald Reagan, and rightfully so. But when it comes to taxes, it pays to be clear about what was achieved during Reagan’s time in the White House. First, there was a big tax cut, and then there was tax reform.

The major tax cut passed in 1981 slashed personal income tax rates across the board by 23 percent (with the top rate declining from 70 percent to 50 percent), indexed tax rates for inflation, reduced the capital gains tax (from 28 percent to 20 percent), and provided for reductions in death taxes. This tax cut, fully phased in at the start of 1983, was essential to reviving an economy that had been a mess largely since the very early 1970s.

Revenue-neutral tax reform came in the Tax Reform Act of 1986. With assorted “loophole” closings, the top personal income tax rate declined from 50 percent to 28 percent, and the corporate rate fell from 46 percent to 34 percent. While an unfortunate and significant negative was an increase in the top capital gains tax rate from 20 percent to 28 percent, the overall effort created a more pro-growth tax structure.

Now, over 30 years since the last tax reform measure was passed, we’re back at the tax reform table. Recent reform discussions actually began under President Barack Obama, spurred on by the recognition that the U.S. now has the highest corporate income tax rate among developed nations. Congressional Democrats and the Obama administration talked up corporate tax reform, while also emphasizing it as a way to raise taxes. They weren’t interested in revenue-neutral tax reform (that is, changing tax rates and the system to be more pro-growth and efficient while raising the same amount of revenue), but instead, they advocated what was called by some “revenue-positive reform” – again, a nice, wonky way to say “tax increase.”

Now, though, Republicans hold the White House, the U.S. Senate and the U.S. House of Representatives, and they have a tremendous opportunity on the tax front. Unfortunately, they seem to be getting bogged down in making revenue-neutral changes. And this is injecting various very bad ideas into the tax reform debate. Trying to make up for lost projected revenue for the federal government from reducing personal income, corporate income, capital gains and death taxes, and expanding expensing options to all businesses, two counter-productive and dangerous proposals have seen the light of day when they should have been kept locked away in the dark, namely, imposing a border-adjustment tax or a carbon tax. Both of those would work against economic growth and against making the tax system simpler.

Make no mistake, U.S. entrepreneurs, businesses, and workers need more than revenue-neutral reforms. They need substantial tax relief.

Keep in mind that the economy has been battered over the past eight-plus years by increased regulatory burdens and tax hikes. After a brutal recession and in the midst of one of the worst recoveries on record, a major tax increase was imposed in 2013, featuring increases in personal income, capital gains, dividend, death and payroll taxes.

Supply-side tax relief works to help the economy in two primary ways. First, it alters incentives by making it less costly to work, save, invest, innovate, and start up, build and run a business. Second, while the added economic growth from this kind of tax relief creates a revenue feedback whereby the government does not “lose” as much revenue as static economic analysis always predicts, leaving resources in the private sector, where decisions are governed by prices, profits, losses and ultimately, consumer sovereignty, versus political decision-making in government, generates additional economic benefits.

So, the ideal agenda for the Republican president and Congress would be to combine tax reform and tax relief. For example, slash personal income tax rates, reduce the corporate tax rate, eliminate capital gains and death taxes, and expand expensing to all businesses.

How to pay for it, as they say? Well, here’s a crazy thought, to the extent that this is actually needed, work to rein in the growth of federal spending, which would create even more plusses for the economy.

Cut taxes, reform the tax code and rein in government – that’s a recipe for increased economic growth, income growth and job creation that Ronald Reagan would understand and so should today’s Republicans.