Pro-Growth Tax Policy
The goal of tax policy should be to raise the amount of money needed to fund legitimate functions of government while doing the least amount of damage to the economy and respecting the principle of treating taxpayers equally.
At the beginning of the 20th century, federal taxes accounted for 3 percent of the nation’s gross domestic product, and federal tax rules filled just a few hundred pages. But for the past sixty years, federal taxes have averaged about 18 percent of GDP, and today, federal tax rules and regulations span over 60,000 pages.
The federal government extracts over $2 trillion in federal taxes from families and businesses each year, which imposes a huge economic cost. The key problem with current federal tax laws is that high rates and the unequal treatment of economic activities create enormous distortions that reduce economic growth.
The reduced growth leaves people with less money to buy food, clothing, and other needed items.
The federal tax rules impose other costs too. The complexity of federal tax rules creates compliance and administrative costs, and it makes financial planning more difficult for individuals and businesses.
Furthermore, the hidden nature of many federal taxes imposes a cost in transparency. In particular, it is difficult for citizens to figure out the overall burden of taxes they are paying under the current system.
Tax cuts are just one step toward the ideal of replacing our outdated and complex Federal Tax Code with a modern and simple tax. Either a flat tax or a single-rate national sales tax (like the Fair Tax) would spur economic growth, be fairer, and would lower compliance costs. A flat tax, for example, has a low tax rate and eliminates the current Tax Code’s multiple taxes on saving and investment. A flat tax also eliminates special preferences and penalties that lead individuals and businesses to often make choices based on tax considerations rather than on economic benefits. This is why a flat tax would boost growth. Since a flat tax also is based on the principle that all taxpayers are treated equally regardless of how they earn their income, how they spend their income, or the level of their income, the system is both morally and economically superior to the current Internal Revenue Code.
A national sales tax has similar benefits. It would also dramatically lower compliance costs and bolster economic growth.
Absent comprehensive tax reform, key tax cuts that would improve the economy include:
- Permanently extend the reduced income tax rates set to expire at the end of 2012.
- Lower or eliminate the dividend tax rate.
- Lower or eliminate the individual capital gains tax rate.
- Lower or eliminate the corporate income tax rate.
- Pass a Balanced Budget Amendment with a supermajority vote requirement to raise taxes.