With Tax Day upon us, American families and employers are keenly aware of the deep cut the government is taking out of their household incomes and hard-earned profits — especially during the slowest economic recovery since the Great Depression.
A heavy tax burden means consumers have less of their income to spend in the economy and businesses have less for hiring, expansion and investment. So when taxes go up, the rate of economic growth goes down.
Even though economic growth is what we badly need to hasten our recovery, many of our leaders in Washington are hungry for even more tax revenue. Some still champion a big government agenda that requires greater resources to implement more programs.
To pay for it, Senate Democrats recently passed a budget with an additional $1.5 trillion in tax hikes. In addition to dragging down the economy, the ill-advised tax increases in the budget preclude Congress from undertaking the fundamental, pro-growth comprehensive tax reform needed to revitalize the economy.
And let’s not forget, there’s a fiscal crisis to deal with. We’ve racked up more than $16 trillion in government debt and are running trillion-dollar annual deficits.
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A fiscal mess
But rather than scale back the agenda or look for serious savings — as families and businesses must do when their ambitions exceed their resources, or when they’re living beyond their means — some government leaders believe, again, that the answer is to simply raise taxes, not slow spending. The truth is we can’t tax our way out of our fiscal mess.
In order to keep our economy humming and put the government back on sound fiscal footing, we must undertake comprehensive tax reform and exercise real spending restraint through fundamental entitlement reform.
On taxes, the right kind of reform will actually drive the stronger growth we need. The right reforms would spur job creation, raise American competitiveness, encourage capital investment, foster innovation, and generate more revenue at every level of government.
Comprehensive tax reform should broaden the tax base so more people are paying into the system and simplify compliance for all business entities.
The U.S. corporate tax rate — one of the highest in the world — must be lowered so American companies can compete in the global economy.
Likewise, businesses that file their taxes as individuals, or pass-through entities, suffer from some of the highest rates among developed economies — they also need relief in the form of lower rates.
Finally, it is important that we move to a territorial system so that American companies operating overseas aren’t taxed twice on their earnings — once at home and once abroad.
Tax reform must be done in conjunction with spending restraint — and there is no greater driver of deficit spending than our entitlement programs.
Spending on Medicare, Medicaid and Social Security already accounts for almost 58 percent of all federal spending.
Heading for bankruptcy
If Congress doesn’t act, within a few decades, automatic spending will consume virtually all of what the government collects. These programs must be reformed so they are solvent for future generations and so they don’t drive our nation to bankruptcy. They can be reformed by slowing the rate of increase and making reasonable adjustments that are phased in over a number of years. The sooner we make commonsense reforms, the less painful the changes will be.
Some leaders in Congress have signaled their support for undertaking comprehensive tax reform. And others are willing to at least talk about entitlement reform, which is a big step forward.
It is the responsibility of the business community to keep the pressure on. Let’s remind Congress and the administration that, when families and employers fall on hard financial times, they must make tough decisions. It’s time for Washington to follow suit.
Martin A. Regalia is senior vice president for economic and tax policy and chief economist at the U.S. Chamber of Commerce.