America needs tax reform now

America needs tax reform now
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Poor economic growth is the top problem facing policymakers. From the end of World War II to 2007, the trend growth rate of per capita gross domestic product was about 2.1 percent. This meant workers could expect their standard of living to double every 30 years to 35 years. Today, projections for population and GDP growth indicate that it will take 70 years, or about twice as long, for workers to double their income. The opportunity to get ahead in America has been badly diminished.

The middle class has been especially hard hit. The latest U.S. Census report on household income was greeted with fanfare, as real median household income rose by 3.2 percent in 2016. But a closer look revealed that for those who worked full time and year round, the increase in household income was actually zero.

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A key to addressing subpar growth is a tax reform that embraces incentives to invest, innovate, hire workers, and raise wages in the United States. Doing so will require real reform comprising permanent, structural changes to the tax code that foster improved productivity growth and rising real wages. This involves incentives to save more and invest in equipment, technologies, business models, and worker skills so that the economy is bigger in the future.

Successful reform will encompass reforms for America’s largest companies, tax relief for small businesses, and tax cuts for the middle class. Business tax reform is especially important. The current code provides incentives for U.S. firms to prefer foreign production over domestic, park large amounts of overseas earnings offshore, and find legal ways to shift profits from the United States to lower tax jurisdictions abroad.

But it must also address the issues of the small business community. There has been a clear and compelling case made for corporate reform, and the president made a campaign pledge to relieve taxes on the middle class. But more than half of all business income is taxed on individual returns in “pass through” entities like sole proprietorships and partnerships. Tax reform should improve incentives for all types of businesses.

The success or failure of tax reform hinges on the implications for growth. The impact of any specific tax provision pales in comparison to the improvement in middle class livelihoods that would come from better economic growth, productivity growth, and real wage growth.

Successful reform is a highly disciplined exercise that is difficult in a political environment. The good news is lower rates and the harder part is broadening the base. But the litmus test is the overall impact, including improved growth. It is tempting to try to evaluate any reform on a provision-by-provision basis, but that is not the real choice. The real choice is between this broken tax code and struggling economy or the whole tax reform and the improved growth it fosters.

When one hears apocalyptic claims about economic death and destruction due to the elimination of a specific tax provision, keep in mind that if one’s business depends on a single tax provision, it is a tax shelter, not a legitimate business activity, and what matters is whether economic life is enhanced by the entire plan.

Reforming the tax code is not a panacea for our economic challenges. But America’s current economic path does not allow us to simply stay the course and hope for the best. Trillions of dollars of global earnings are locked out of the United States by the tax code. Headquarters of U.S. firms continue to migrate overseas to competitor companies.

The fact that the economy is stuck in low gear has visited distress on large swaths of the labor market and household sector. Doing nothing is dangerous. Reform is an imperative.

Douglas Holtz Eakin is president of the American Action Forum. He served as director of the Congressional Budget Office under President George W. Bush from 2003 to 2005.