April 18, 2017

Getting to True Tax Reform in 2017

A Better Way

The United States has an infamously dense and complicated tax code that is in dire need of simplification. The tax system severely distorts individual and business decisions and the allocation of their respective resources; it hampers job creation and impedes both economic growth and tax revenue.

As policymakers further develop their tax reform agenda, a new Mercatus Center policy brief outlines the key goals for successful tax reform (below). It applies these goals to specific policy proposals, including several components of the House Republican Tax Reform Task Force Blueprint.

Academic research suggests that a successful revenue system should be:

Simple. The complexity of the tax system makes compliance difficult and costly. Complexity also encourages tax avoidance. A simpler and more transparent tax code promotes compliance and increased revenues.

Efficient. The current tax code impedes economic growth by distorting market decisions in areas such as work, saving, investment, and job creation. An efficient tax system provides sufficient revenue to fund the government’s essential services with minimal distortion of market behavior.

Equitable. Americans of all income levels believe the tax code is unfair. This perception is largely fueled by the code’s “loopholes”—provisions intended to benefit or penalize select individuals and groups. “Tax fairness” should reduce or eliminate provisions that favor one group or economic activity over another, especially among equal-income earners.

Predictable. Tax certainty is a necessary condition for robust economic growth and investment, and it enhances competitiveness. An environment conducive to growth requires a tax code that provides both short- and long-term predictability.

The House Republican Blueprint provides an overall good plan to reform the tax code. However, the novel proposal of a border adjustment tax presents an unnecessary risk to the US economy and should be avoided. The proposed border adjustment should be recognized as little more than a new source of revenue because it is not a pro-growth reform. Policymakers should focus on more conventional and pro-growth reforms going forward.