A Dozen Economic Facts About Tax Reform
Released: May 2012 • Strategy Paper
Taxes and tax policy are on the table for discussion. Policymakers continue to look at tax cuts— most recently, the payroll tax cut and reductions for small business—as instruments for aiding the nation’s economic recovery. And, fiscal issues will continue to dominate the policy agenda as the federal government faces the expiration of the Bush-era tax cuts, the onset of the deficit “trigger,” and another debate over the debt limit—all colliding at the end of 2012. Across the political spectrum, one of the few points on which today’s policymakers agree is that the tax code is in desperate need of reform in order to be able to contend with issues ranging from American competitiveness to income inequality.
To further complicate these challenges, today’s tax reform debates are often based on misconceptions or lack good evidence. To that end, The Hamilton Project aims to provide a series of facts that can help ground the policy discussion. They are presented in the spirit of the late U.S. Senator Daniel Patrick Moynihan’s famous saying, “Everyone is entitled to his own opinions, but not to his own facts.”
Since the last major tax reform in 1986—roughly a generation ago—the number of loopholes, special preferences, and the sheer volume of the tax code have ballooned, resulting in a system widely considered to be inefficient, complex, and unfair, as well as an impediment to growth. Drawing a page from successful prior reform efforts, advocates of comprehensive tax reform generally urge that we broaden the base and lower rates.
However, the current economic context for tax reform is far more challenging than it was in 1986. Most immediately, the economy is still in the midst of a slow recovery with an unemployment rate that remains too high. Even with robust rates of job growth, it will take years to close the jobs gap. An important role of fiscal policy in the near term is to support recovery in the labor market.
But in the longer run, the United States is contending with three economic problems: a daunting outlook for budget deficits that imperils our well-being, an increasingly competitive global economy for many American workers and industries, and rising income inequality. The tax code interacts with each of these problems, and a successful tax reform effort will need to address each of them—or at least avoid making any of them worse.
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