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Why We Need Tax Reform

While the Super Committee's goal is to cut the national debt by a measly $1.2 trillion out of the CBO's estimated $9 trillion increase over the next decade, low expectations exist for a solution to provide fiscal sanity. In order to put Americans back to work again, reforming the tax system should be a top priority. A simple, less obstructive tax system, such as Perry's flat income tax, would be much more efficient than our current progressive marginal tax system. Even if a new tax system would bring in a lower amount of revenue, there are very few legitimate roles for the federal government, and the level of spending should be cut dramatically. 

What are the effects on economic growth and tax revenue from our current tax system? This can be explained by the Laffer Curve, which is a theoretical explanation noting the range of tax rates that disincentivizes individuals to work and prohibits economic growth. The decline in hours worked and productivity reduce the amount of income that can be taxed and therefore reduces tax revenue. The tax reforms by President Ronald Reagan in 1986 are a perfect example. In a recent article, Martin Feldstein explains that these lower tax rates in the 80s led to an increase in tax revenue, because private investment increased, more individuals were hired, and constraints on economic growth were removed.

There are a number of alternatives currently being discussed by Republican presidential candidates that would increase potential economic growth significantly more than the tax code we have today. Some are arguing that these alternatives (i.e. Perry's planCain's 9-9-9 plan, and the Fairtax) will not bring in sufficient revenue to pay for current government outlays. 

The problem with this argument is that it assumes that current federal government spending is at the "right" amount. There has been an insurmountable increase in government spending for quite some time, and many of the programs that are not effective should be removed and stimulus funding should not be made permanent.

Let’s let the people take the power back from the government and reduce its size and scope. We can do this by moving to a tax system that focuses on reviving economic growth by increasing economic choices by individuals and firms through market-oriented policies, which may coincide in many cases with supply-siders. Changing the tax system to one that can incentivize individuals to work and save and firms to reduce their costs of production should be a goal. 

We have been going down the same road of tinkering around the edges of taxes and spending that have not been successful. These actions have made us more dependent on the government. This is apparent across our economy, and until the citizens of our great country can take back the reigns from government and allow markets to work without manipulation, we will stifle the entrepreneurial spirit that has made America an economic superpower. 

I always refer back to my two favorite economists: Milton Friedman who said something similar to "an increase in government reduces individual choices and freedoms" and Hayek who may have referred to it more precisely by noting that "expansion of government makes men slaves." Do we want a government that provides an economic environment that fosters economic growth, or should it supply goods and services that some believe the private sector fails to provide? This is the dilemma that we continue to face, and it is time that we think outside the box and reform the tax code.

Photo Credit: alancleaver_2000

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