October 10, 2011

Tax Reform Part Of Multipronged Solution

Guest column submitted by U.S. Senator Mike Crapo

The Senate Finance Subcommittee on Fiscal Responsibility and Economic Growth, on which I serve as Ranking Member, recently held a hearing to explore the rolefor tax reform in comprehensive deficit reduction and U.S. fiscal policy.  Tax reform is a necessary part of improving our economy.  However, to fully get our nation on better footing, a multipronged solution is needed that includes pro-growth tax reform, regulatory reform, fundamental entitlement program reform and strict budget enforcement. 

The need for comprehensive tax reform is not in dispute.  We would be hard pressed to create a more expensive to comply with, complex, unfair, burdensome, inefficient and anti-competitive tax code than our current code.  But, positions differ regarding when tax reform should occur and what should be the primary goals and elements of tax reform.  Some have called for a combination of raising tax rates and modifying or eliminating tax expenditures to raise revenue that would be dedicated to deficit reduction.  Other proposals, such as the Gang of Six proposal on which I worked, have called for pro-growth tax reform that lowers all tax rates, simplifies the tax code and reforms our corporate tax code to make U.S. businesses more competitive, with the goal of this tax reform being a significant increase in economic growth. 

The primary focus of tax reform should be to make a stronger, more dynamic economy, not to raise tax revenue through higher tax rates.  History has shown that revenues return to the historic average (18.2 percent of U.S. Gross Domestic Product (GDP)) regardless of how high Congress tried to raise the tax rates.  Other than in the year 2000, of the 11 other times since 1940 when our budget has been in surplus, revenues were less than 20 percent of GDP, and in 7 of those 11 years, revenues were below 19 percent of GDP. 

Rather, tax reform focused on growth, through lowering rates and compliance costs, will better enable the private sector to create jobs.  As John Engler, President of the Business Roundtable, observed in his testimony, employment follows economic growth, and tax policy must focus on growth.  Pro-growth tax reform along with controlling the explosion of federal regulations that are putting a strangle hold on job creators can improve the competitiveness of U.S. businesses and our economy.

Many of the witnesses at the hearing noted that, while tax reform is an important goal for Congress, fundamental entitlement reform must also be a primary and immediate goal, as it is by far the primary driver of our long-term fiscal shortfall.  Former Federal Reserve Chairman Alan Greenspan mentioned in his testimony that the Medicare program does not have enough projected revenue to cover projected future spending.  "But rather than repairing that huge shortfall, and a lesser one in Social Security, we expanded entitlements still further."  This must also be addressed.   

Overspending is the root of our nation's fiscal problems.  Nevertheless, even if we drastically cut spending, which we must, if our economy continues to be persistently sluggish and unemployment remains high, policies that will generate robust economic growth must also be a priority.  A comprehensive solution that includes pro-growth tax reform, regulatory reform, entitlement reform and strict enforcement mechanisms will get our nation on a more stable budgetary path and keep future congresses from diverting from that path. 

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