Tax reform must put the recovery first

USA Today | Edmund Burke, the British statesman, wisely said, “To tax and to please, no more than to love and be wise, is not given to men.”

No taxpayer expresses love for the IRS, especially as the filing deadline looms next week. This is also the time when presidents and congressional leaders make tax reform promises that are quickly forgotten. Blue-ribbon commissions are created but then largely ignored. Historically, little more than lip service ends up being paid.

First, Americans are very worried about our looming fiscal train wreck. Every day they hear about bloated government spending and ballooning deficits and debt. This angst birthed the Tea Party movement, but today Congress and President Obama know the U.S. cannot continue on its present fiscal path. It is no longer a question about whether to cut, but where to cut. Tax policy must be part of the equation, and even Obama has come to the table now.

Second, Americans have lost confidence in the U.S. tax system. Americans believe “Washington special interests,” “Wall Street” and “corporate fat cats” are getting all the tax breaks while they get stuck with the bill. When General Electric’s federal tax bill is zero, you know we’ve reached critical mass.

Finally, there’s the B-bomb: bankruptcy. The U.S. government borrows 41 cents of every dollar it spends. If foreign creditors, especially governments like China, no longer lend us money, interest rates will soar. Our financial markets will tank, which could lead to recession if not depression. Either we act now on our own volition or we do it at gunpoint.

At some point, those in a position to actually do something about it will have to act. When that day comes, here are some tax reform do’s and don’ts intended to maximize economic growth and job creation:

  • Do: Adopt lower, flatter tax rates. The numbers can be hammered out later, but the U.S. corporate tax rate, at 35%, will soon be the highest in the world. Nearly all economists agree that lower corporate and individual tax rates stimulate economic growth.
  • Don’t: Forget how to pay for it. Lower, flatter rates create more economic growth but not enough to avoid taming our spiraling debt. The first effort must be fair, fundamental spending cuts that don’t jeopardize economic growth. The second is a no-brainer — end tax loopholes for special interests. Third, popular but costly deductions such as home mortgage interest, medical expenses and charitable contributions must be curtailed or eliminated.
  • Do: Harness the tax code to make America competitive again. Once we get out of this economic downturn, the U.S. must boost long-term saving and investment. This requires a fundamental shift in what we tax.

Today, savings, investment and hard work are taxed excessively. Meantime, the tax code essentially rewards consumption and spending, whether it be a new car for your teenager or that vacation home. Similarly, business investment in new factories, machinery and start-ups that create jobs shouldn’t be penalized at tax time. Better tax treatment of savings and investment yields greater return than any government program.

In a recent study, Allen Sinai of Decision Economics consulting group concluded that eliminating the capital gains tax would create jobs at a cost to the federal government of only $18,000 per job. In contrast, recent federal stimulus programs created jobs at a cost of $92,000 per employee.

Contrary to Burke, a simpler, fairer tax code that facilitates economic growth and job creation is both wise and might be one that all taxpayers can learn to love.

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