Although President Obama is unlikely to make this the centerpiece of his State of the Union address, an overhaul of the complex US federal tax system should form a key component of any growth-oriented economic policy program.
The complexity of the current code makes it a paradise for lawyers, accountants and for the big corporations that can afford to work their way through available loopholes and exemptions. The same complexity is a nightmare for households and small businesses. Most especially, it imposes a severe brake on the rate of small business creation – itself the engine of job creation. The US has one of the highest corporate tax rates in the developed world. Yet, large corporations pay a lower effective rate than the average. Small businesses tend to pay the headline rates.
If President Obama truly wishes to rekindle the spirit of President Reagan’s bipartisan 1986 tax reform, he should seek to lower, broaden, and simplify both income and corporate taxes, eliminating as many loopholes and exemptions as is politically feasible. In so doing, he would be able to lower the headline rates while simultaneously generating the additional tax revenues to the 20 per cent of gross domestic product ratio required for long-term debt reduction.
Obama’s presidential reputation, long-term, depends significantly on whether or not he shares Reagan’s vision on this crucial issue.
Hat Tip: Financial Times, February 12, 2013
