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October 11, 2012

Tax Reform is about Economic Growth

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For weeks now, the debate on tax reform has been bogged down by a Tax Policy Center (TPC) analysis that concluded, incorrectly, that Mitt Romney’s tax reform plan would “mathematically necessitate” a tax increase on the middle class.

I detailed the errors in TPC’s analysis and showed how Romney’s plan doesn’t raise taxes on the middle class here. Others have exposed flaws in the TPC analysis as well.

Amid the back-and-forth necessary to set the record straight, the debate lost focus on why tax reform really matters. As Vice President Joe Biden and House Budget Committee chairman Paul Ryan (R., Wis.) prepare to debate tonight, now is a good time to step back and remember the purpose of tax reform: to overcome a lackluster recovery and revitalize economic growth.

Tax reform encourages growth by removing the barriers to engaging in productive activities: working, saving, investing, and taking on risk. It does this by lowering marginal tax rates on income, eliminating distortionary incentives in the tax code that misdirect the nation’s resources to less productive activities, and by reducing — or better yet, eliminating — the general tax bias against saving and investment.

True tax reform makes these improvements while ensuring the new tax code raises the same amount of revenue as the current code, it is revenue neutral. It achieves lower tax rates and revenue neutrality by broadening the tax base. Tax reform should also be distributionally neutral, meaning it does not systematically shift the tax burden from one group of taxpayers to another.

Romney’s plan follows this model. To strengthen economic growth, it reduces all marginal tax rates by 20 percent and eliminates taxes on saving and investment for incomes below $200,000. It also abolishes the death tax and the Alternative Minimum Tax (AMT) to spur growth further.

Romney has said he’d work with Congress to broaden the base to make his reform revenue neutral and to ensure it doesn’t shift the existing tax burden.

Stronger economic growth is the reason many policymakers propose to reform taxes. Ryan, as Chairman of the House Budget Committee, proposed such a plan. So did Senator Ron Wyden (D., Ore.), along with Senator Dan Coats (R., Ind.). So did the president’s own Simpson-Bowles Commission. There is bipartisan recognition that we need tax reform to improve the economy.

If Congress adopted a sound approach to tax reform, the economy would be stronger going forward. More Americans would be employed, and wages would be higher. Tax reform is one of the many policy improvements Washington should make in order to improve the prospect for American workers.

This is why tax reform is so vital today. It is important to keep this fact that in mind during tonight’s debate and going forward in 2013.

— Curtis Dubay is the senior tax policy analyst at The Heritage Foundation’s Roe Institute for Economic Policy Studies.

First appeared in National Review Online's The Corner.

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