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Reforming The Tax Code


Published: August 15, 2017

The primary goal of America’s tax code should be to raise the revenue to finance the necessary functions of government in the least distortionary manner possible. Tax systems with broad bases and low tax rates are the most effective foundation for an efficient, growing economy. While consumption taxes are efficient, all forms of taxation should be considered as long as they are revenue-neutral and accompanied by rigorous, enforceable spending controls.

Discussion Questions

  1. What can the government do to keep taxes as low as possible?
  2. What’s wrong with having a high corporate tax rate in OECD?

Additional Resources

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America’s tax code is in desperate need of an overhaul.

The U.S. has the highest corporate tax rate in the OECD and the most progressive tax system when it comes to the share of all taxes paid across the income distribution.

If the current cascade of taxes continues and spending is not reigned in, marginal tax rates for most Americans will exceed 60% - making the majority of American workers minority partners in their own labor.

Taxes affect economic decisions, and higher taxes mean people work and save less than they otherwise would.

That doesn’t mean taxation is unnecessary or inherently bad. But taxes should be kept as unobtrusive and low as possible, while still raising sufficient funds to cover government spending.

Rigorous and enforceable budget controls are also an important part of keeping tax rates low.

Unfortunately, our tax system is used for much more than just raising revenue.

Deductions, exemptions, and tax credits are used to encourage or discourage specific behaviors, thereby turning taxation into a form of regulation.

Tax expenditures where politically favored organizations or industries receive exemptions from taxes leave over a trillion dollars a year in potential tax revenue uncollected.

By taxing income so heavily, we reduce the incentives to work, hire, invest, and save by making those activities less financially rewarding.

This slows our potential economic growth, hurting economic mobility and security.

Good policy would raise revenue by broadening the tax base and producing rates, thereby minimizing economic distortions.

Taxing consumption instead of income would be even less disruptive and would more efficiently raise the revenue necessary to fund crucial government operations.

Either way, a simpler tax code with similar revenue lead to higher long-term growth.