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January 13. 2014

Looking Ahead: Tax Reform in 2014

As 2013 drew to a close, there was widespread speculation about the future of tax reform. But while prognosticators and pundits may disagree about what Congress will do next, what is indisputable is that tax reform, done right, would be a tremendous boon to the American economy. That’s why, fresh off their recent budget agreement, Republican Congressman Paul Ryan and Democratic Senator Patty Murray both identified tax reform as an important next step: it’s an important opportunity to do something beneficial for the American economy.

Recently, a study from the non-partisan Tax Foundation suggested reforms to improve a sluggish economic recovery and slow growth. “Tax reform can address these problems,” the study says, “by cutting the corporate tax rate, currently the highest in the developed world…and moving to a territorial tax system.”

Another study from the Berkeley Research Group also highlighted the benefits of adopting a modern hybrid international system:

“Our research finds that transitioning to a territorial tax system similar to those used by other advanced industrial countries would generate a significant amount of economic growth and create jobs here in the United States. As lawmakers in Washington look for policies to boost economic growth and job creation, reforming the corporate tax code to allow American businesses to invest their foreign earnings in the United States now and in the future is an opportunity that should be considered.”

Specifically, they found that these key tax reforms would increase the amount of foreign earnings that are repatriated to the United States by $114 billion annually. In turn, these earnings would – each year –boost U.S. GDP by $22 billion and create more than 150,000 jobs.

Corporate tax reform done correctly will also benefit American workers and future generations. Writing in the New York Times, economist Laurence Kotlikoff says “I, like many economists, suspect that our corporate income tax is economically self-defeating — hurting workers, not capitalists, and collecting precious little revenue to boot.”

He goes on to note that, in his model, reductions in the corporate tax rate “generate welfare gains for all generations in the United States, but particularly for young and future workers.”  In other words, corporate tax reform isn’t a special interest benefit for big companies; it’s something that would benefit the entire U.S. economy – especially workers.

All of these benefits are easily attainable, and we can achieve them in a revenue-neutral way. As the American economy continues to slowly improve, members of Congress should look to tax reform as a way to give the recovery a shot in the arm – and increase the competitiveness of American companies in the global marketplace.

2014 is the time to act on tax reform.