"Time to Reform Complex Tax Code"
December 9, 2012
Author: Elaine Kamarck, Lecturer in Public Policy
Belfer Center Programs or Projects: International Security
There are very few "teaching moments" in politics, but the drama surrounding the current debate over the fiscal cliff is one of them. As it unfolds, it is becoming clear that it is time for comprehensive tax reform. Last reformed in 1986, America's Tax Code was once the envy of our trade competitors. By broadening the base and lowering the overall rate, President Ronald Reagan and House Speaker Tip O'Neill set the tax standard for the rest of the world that led to two decades of unparalleled economic success.
In the years between then and now, other nations noted America's achievement and followed suit with their own reform. Over the next 25 years, all of our competitors continued to lower their tax rates to the point that the American corporate tax rate of 35 percent is now the highest in the world.
Although America's gross domestic product is growing and jobs are slowly being created, economic growth is not where it needs to be. As the debate unfolds, it is clear that growth has been constrained by an unnecessary burden, an inefficient and uncompetitive corporate Tax Code. Comprehensive tax reform that lowers the rate and broadens the base will make the United States more competitive. Both President Barack Obama and House Speaker John Boehner support this.
A high corporate tax rate hurts American businesses and crushes job creation. In today's global economy, capital is increasingly mobile and companies have the choice of where they should be based. America was once the best country in the world to start and grow a business. Unfortunately, with technological advances and our competitors continuing to lower their corporate tax rates, that is no longer true. The average of our top trade partners in the Organization for Economic Cooperation and Development is 25 percent; a full 10 points lower than the United States. Such a high rate hurts the ability of American companies to compete abroad and lowers job creation in the United States.
In the 26 years since the last comprehensive reform, the Tax Code has become riddled with thousands of exemptions that now make the system incredibly complex. The ever-changing nature of our Tax Code doesn't allow businesses to plan for the future and invest with an eye toward long-term growth. Moreover a complex Tax Code distorts business decision making and hampers pro-growth strategies. A complex corporate Tax Code causes economic uncertainty. In fact, the World Bank ranked the United States 69th in its 2012 Doing Business report in terms of ease of paying taxes. America's complex Tax Code forces companies to allocate resources to accommodate tax intricacies instead of focusing on growing their businesses and creating jobs. The high rates, the confusion, the exemptions — is all further evidence that in order to have robust growth, America's Tax Code needs to undergo comprehensive reform.
The top priority for Democratic and Republican lawmakers is jobs. Reforming the corporate Tax Code by lowering the rate to an internationally competitive rate and broadening the base is just the solution we need. For example, a corporate rate of 25 percent would add 581,000 jobs every year for the next decade and increase GDP growth by up to 2 percent. More important to the middle class, comprehensive tax reform would boost take-home pay for a family of four by $2,484.
The good news is there is common ground that exists between Democrats and Republicans on the need to enact comprehensive tax reforms that will put American workers and American businesses on more sound footing, and the urgency to act during the lame-duck session to set the stage for reforms in early 2013. But Congress needs to act.
America's economy is still the strongest in the world. For years, our competitors have advanced themselves by following our example. Now we need to raise the bar. Our lawmakers must lower the corporate tax rate, simplify the system and boost job creation. The path is clear for comprehensive tax reform; all that's left is for our leaders to make the tough choices that our economy requires.
Elaine Kamarck is co-chairwoman of Reforming America's Taxes Equitably coalition.
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