Comprehensive tax reform is one of the most important things Congress can do to improve the nation’s economy. Sensible reform will improve the nation’s fiscal balance, increase competitiveness, and spur investment. Each of these will lead to increased productivity and living standards. Yet, despite clear economic evidence, progress has been hard to achieve. Although legislators on both sides of the aisle agree on its importance, the issue has lacked the political support needed to force legislation forward. The current presidential campaign may have even set events back. Without a determined push by the next president, tax reform is unlikely to happen for many years.
The Information Technology and Innovation Foundation (ITIF) has previously argued that the United States suffers from three significant public debts: a fiscal debt that exceeds 70 percent of GDP; a trade debt that is accumulating at between 2 and 3 percent of GDP per year; and an investment debt that takes a variety of forms, including inadequate investment in research, education, and infrastructure.
Comprehensive tax reform done the right way is one of the few initiatives that can significantly improve all three deficits and debts. Even if the reform does not raise additional revenues, it is likely to increase GDP. This will lower the debt-to-GDP ratio, reducing the burden of the debt. By boosting the competitiveness of goods and services produced in the United States, the right tax reform should increase exports and decrease imports, thereby improving the trade deficit. Finally, intelligent reform would increase incentives to invest in America. A significantly reduced corporate tax rate, coupled with the right expanded investment incentives, would lower the hurdle companies must clear in order to make an investment, whether in machinery and equipment, research and development, or workforce training. This, in turn, would increase demand for the public sector complements needed to make corporate investment successful, including modern infrastructure and trained workers.
Academic studies clearly show that the economic costs imposed by corporate taxes exceed those imposed by individual income taxes or consumption taxes, particularly at the current statutory rate. There is also sound evidence that the high U.S. rate is causing a growing number of companies to move abroad and for others to lose market share in globally contested industries. Finally, few people dispute that some of the tax exemptions and deductions currently in tax law do little to benefit the economy or the broader social welfare. Eliminating these and using the additional revenue to reduce the statutory rate and boost or create effective incentives (like the R&D tax credit and an innovation box) would boost the economy.
Despite this evidence, an impartial observer could argue that there has been little progress since ITIF’s last report on the need for tax reform in 2014. Congress has held many hearings on the issue, and a notable bipartisan consensus has emerged, especially on the need to reform taxation of foreign profits. But large gaps still remain in the way both parties approach the reform of individual and corporate taxes. Despite areas of agreement, the Obama administration has never devoted the time and effort needed either to strike a deal with the Republican majorities in Congress or develop a version of reform that gathers strong public support. As a result, momentum has stalled.
The need for reform still exists, however. This report reviews some of the academic evidence supporting tax reform. It also summarizes some of the main political issues that still need resolution. These include the scope of reform, integration of the corporate and individual tax systems, and creation of an innovation box. As in other areas, such as immigration and regulatory reform, disagreement on a few key issues is preventing policymakers from acting on areas where they do agree. Finally, the report looks at prospects for reform in the next administration.