Fiscal Conservatives Should Support Tax Reform


This week, the U.S. Senate is slated to vote on comprehensive tax reform. But some fiscal hawks are worried about the bill’s impact on the deficit.

In the short term, these lawmakers are right to worry. Contrary to the analyses of some optimistic supporters, the tax cuts probably won’t pay for themselves. But fiscal hawks like Senators Bob Corker (Tenn.), Jeff Flake (Ariz.), Todd Young (Ind.), and James Lankford (Okla.) should support this bill with a clear conscience because the economic benefits outweigh its costs, laying the groundwork for policymakers to address the real sources of our fiscal challenges.

For starters, tax reform won’t cost nearly as much as critics suggest. Citing fiscal conservatives’ longstanding commitment to bringing the federal ledger into balance, tax reform’s opponents have seized on the Joint Committee on Taxation’s $1.5 trillion estimate of the bill’s cost over the next decade.

But that number is problematic. First, it doesn’t account for the economic growth that tax reform would engender. In fact, the Tax Foundation estimates that the bill could result in a 3.7 percent increase in gross domestic product over the long term — which would generate nearly $1.3 trillion in additional revenue. Second, JCT’s estimate is based on “current law” instead of “current policy.” That’s an important distinction.

“Current law” assumes that every piece of legislation will take effect in precise accordance with, well, the law. But Congress routinely extends “temporary” policies that impact revenues. So while the precise budgetary impact of tax reform is debatable, the JCT estimate is certainly an exaggeration.

A lower-than-advertised cost isn’t a good enough reason for fiscal conservatives to support tax reform, of course. But the economic benefits of the measure are very real.

The tax bill would update America’s outdated tax code by, among other things, reducing the corporate income tax rate. Today, that rate stands at 35 percent — higher than any other industrialized nation. The bill would drop it to 20 percent. The measure also encourages U.S.-based multinational companies holding cash abroad to bring it back home.

These changes will make the U.S. economy more competitive and allow companies to keep more of the money they earn. This will enable companies to raise wages, create jobs, build new facilities, and research and develop new products.

Indeed, the Tax Foundation estimates that the tax overhaul will result in about 1 million new jobs nationwide. That includes about 19,000 new jobs in Tennessee; 17,000 in Arizona; 20,000 in Indiana; and 11,000 in Oklahoma.

American workers will undoubtedly see higher wages. A thorough review of economic literature led the Tax Foundation to conclude that “labor bears between 50 percent and 100 percent of the burden of the corporate income tax.” This syncs up with an analysis from the nonpartisan Congressional Budget Office, which estimates that labor bears about 70 percent of the corporate tax burden.

The relationship between corporate tax rates and wages is why the Council of Economic Advisors conservatively estimatesthat the median household will see $4,000 in additional annual income if the corporate rate declines to 20 percent.

If lawmakers can strengthen the economy for everyone, then the nation will be better equipped to tackle the long-term fiscal challenges that are harming the economic prospects of future generations.  These fiscal challenges are caused by the persistent, and unaffordable, growth in government spending.

For example, right now, two of every five dollars spent by the federal government goes to Social Security, Medicare, and Medicaid — and all three programs are growing unsustainably. It follows that sustainable solutions to our fiscal challenges will only be achieved through fundamental spending reforms.

Lawmakers have been averse to spending reform because it requires difficult trade-offs. Faster economic growth makes these trade-offs a bit easier, making the necessary spending reforms more attainable.

Our nation’s debt is rising because of too much spending, not too few taxes. While tax reform will not pay for itself, at least in the short term, it will deliver a jolt to the economy and help reverse the recent trends of economic stagnation. Without that economic jolt, it is simply more difficult for fiscal conservatives to rein in the federal budget.

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Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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