April 15, 2008
Fundamental reform of the U.S. tax system poses significant political challenges, but it offers the opportunity to rationalize many aspects of the tax system, according to Tax Foundation testimony before the Senate Finance Committee on April 15.
Vice President for Economic Policy Robert J. Carroll told the tax-writers that fundamental tax reform has the potential to reduce the compliance burdens imposed on both households and businesses, and at the same time create an environment for greater economic growth in the long-term in a manner that is appropriately fair.
A fundamental issue highlighted by Carroll was the choice between income-based and consumption-based taxes. Consumption taxes generally reduce the tax on saving and investment, and Carroll stressed the importance of this way to boost economic performance and living standards in the longer term, in a way that retained the current progressivity of the tax system.
Among the federal government's most important challenges, Carroll said that reforming the corporate income tax is becoming more urgent as our major trading partners around the world take the initiative. This was the theme of a recent Tax Foundation Fiscal Fact by Carroll.
"By standing still, the United States can expect to see reduced inflows of foreign capital and investment because the United States will be a less attractive place in which to invest, innovate and grow," commented Carroll. "In the near-term, this would translate into slower economic growth, a slower advance in labor productivity, and less employment."
Carroll also warns about the effect a significant tax disparity would have on innovation in the U.S.
"A key determinant of economic growth, innovation tends to take place where the investment climate is best," said Carroll. "Higher investment spurs innovation by raising the demand for these new technologies. This interplay between innovation and capital accumulation makes failure to reform the U.S. business tax system more damaging to the economy. As the U.S. corporate tax becomes ever more burdensome, the United States may fall behind in innovation and productive capacity."
Carroll's testimony is available at http://www.taxfoundation.org/publications/show/23092.html.
The Tax Foundation Fiscal Fact, No. 123, is titled "The Economic Consequences of Being Left Behind: A U.S. Business Tax System that is Out of Line Internationally," and is available at http://www.taxfoundation.org/publications/show/23092.html.