Tax Reform Sounds Good, but Economic Reform Sounds Better

Home Tax Reform Sounds Good, but Economic Reform Sounds Better

September 5, 2017
Jim Rounds

The discussion has shifted from healthcare to tax reform. We can do better with our definition though. I believe in small government and low tax rates. But, I also understand that the government is spending far more than it’s collecting, and that a lot of things make the economy run. If this is the case, we may want to discuss tax rates in the broader context. 

There are some key points to make. First, there probably won’t be full tax reform, but we can still start big and work our way back. There will more likely be a limited number of changes to select tax categories. The corporate income tax rate is too high. But, few have gone into the weeds and legislation is written based on details. There’s a difference between nominal and effective tax rates. Where do we stand compared to other countries in terms of actual tax liability? If this is an economic development discussion, what are the effective tax rates in each of our key industries?

There are more. What is the optimal tax rate that allows for competitive activity while also not further breaking the budget? How do the other business inputs compare across countries like property rights, workforce skill and availability, and product distribution network? If we are deficient in key areas do we need to be even more competitive in terms of tax rates, or vice versa?

It’s not all about the corporate income tax. What other tax law changes should we make while there is an opportunity? Can we address personal income taxes while not worsening our debt problems or putting other tax law changes at risk? Are we going to mess with NAFTA and worsen our competitive position? There’s a way of doing this right and several ways of doing it wrong. Given we are talking about several hundreds of billions of dollars, we should ask the proper questions.

Furthermore, as just noted, tax rates alone don’t drive economic prosperity. We also need to eliminate excessive regulations, build roads, provide security, encourage the development of an educated workforce, etc. Improving our position on all these items adds up to true economic reform. Regulations are being addressed. We still need major infrastructure investment but it will be expensive. How will the additional spending on infrastructure (or anywhere for that matter) impact the debt problem? Should this be part of the tax rate debate since debt is simply the result of spending more than one is collecting? If we do take on additional debt, what are the later consequences? Are we just borrowing economic activity from the future, and how much?

The biggest disappointment is that these issues are still largely in question format. If the discussion pivots to broader based economic reform, and we ask and answer the right questions on the individual components, we will see improved GDP, employment, and income numbers as we move forward. We won’t simply be borrowing from the future and a significant amount of net-new economic activity will occur. Will politics allow for a review of multiple economic inputs at the same time? Probably not, but we can still have the discussion.

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