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December 12. 2014

Time is now for tax reform

By Laura Tyson and Douglas Holtz-Eakin

The results of the midterm elections are in, and the exit polls indicate that voters have sent a clear message to leaders in Washington: Americans are worried about their economic security and fed up with the business-as-usual approach of leaving important problems unfixed. Today, the conventional wisdom is that there may be just enough political oxygen in Washington between now and the next election cycle for Republicans and Democrats to work together on policies to increase jobs and wages. Tax reform is one area that enjoys bipartisan support. We believe that correctly structured tax reform could foster a new wave of business investment that would benefit the middle-class through more job opportunities and higher wages.

Near unanimity among economists is rare, but you would be hard-pressed to find one who does not believe that there are two important economic trends that need to be addressed to help the middle-class: wage stagnation and anemic business investment. The majority of American workers have endured more than a decade of stagnant or falling real wages. And despite five years of recovery, private sector investment continues to lag historical rates as a share of national output. We think that tax reform is ripe for political cooperation because it attacks both of these problems.

In the wake of the midterm election, both the President and Leaders Boehner and McConnell have noted their willingness to work on tax reform in a bipartisan fashion, a very hopeful sign. At his post-election press conference, President Obama stated, “there is an opportunity for us to do a tax reform package that is good for business, good for jobs, and can potentially finance infrastructure development here in the United States.” What’s more, Leaders Sen. McConnell (R-Ky.) and Speaker Boehner (R-Ohio) wrote a joint op-ed in the Wall Street Journal in the days following the midterm elections that called for tax reform as an issue that the new Congress can get to work on: “Our priorities in the 114th Congress will be your priorities. That means addressing head-on many of the most pressing challenges facing the country, including: The insanely complex tax code that is driving American jobs overseas.” We agree.

To be effective, tax reform must fix the two major problems with the U.S. tax system. First, tax reform must lower the corporate income tax rate, which is the highest in the developed world. Second, the U.S. needs to adopt a modern globally competitive international tax system that will level the playing field for American businesses – big and small – and American workers. The U.S. is one of the few remaining developed countries that has not adopted an international tax system that removes the tax barrier to investing business profits earned overseas at home. Together, our outdated international tax system and high corporate tax rate are stifling economic growth and job creation.

Momentum is building for tax reform. In recent months, editorial boards across the country have called for tax reform as a way to boost economic growth. Sen. Ron Wyden (Ore.), the top Democrat on the Senate Finance Committee, says that we now have “a clear window of opportunity to enact comprehensive tax reform” and that both parties “share a common goal of ensuring that the United States is on a long-term path to sustained economic growth.”

Tax reform can boost the U.S. economy and create jobs. We’ve seen tax reform work in other countries. The average corporate tax rate in the other OECD economies has dropped by almost 20 percentage points over the last 25 years, while the combined US federal and state rate has increased by half a percentage point. Over the same period, 19 OECD economies have modernized their international tax rules to allow the global earnings of their businesses to be invested at home with little or no repatriation tax, leaving the United States as one of only 6 OECD economies that still uses a worldwide tax system. Now, President Obama and the new Congress, Republicans and Democrats, must work together to deliver tax reform that improves the American economy and helps American companies and their workers thrive and succeed.

Tyson, former chair of President Bill Clinton’s Council of Economic Advisers, is currently a professor at the Haas School of Business of the University of California, Berkeley. Holtz-Eakin, former director of the Congressional Budget Office under President George W. Bush, is president of the American Action Forum.

(via The Hill)