It’s the morning after the 2014 elections. Republicans have won the Senate and grown their majority in the House.
Next on the agenda: build a legislative record of accomplishment; immunize themselves against primary challengers and Democratic rivals; and, most importantly, promote economic growth and fiscal responsibility.
The answer as to how is obvious: for House and Senate Republicans, comprehensive tax reform is good policy – and good politics.
A new survey released on October 21 by accounting and consulting firm BDO USA found that a clear majority of board members at public companies want Congress to pass broad-based tax reform legislation on both the corporate and personal level.
At least 70,000 pages long and crammed with confusing and market-distorting provisions, the current tax code substitutes rational economic decision-making for the pursuit of advantages allocated by the federal government.
For high-earning individuals, the top rate is 39.6 percent, with new taxes mandated by Obamacare raising the actual top rate to almost 45 percent. The result? Cumbersome, burdensome taxes that make many of the most productive Americans waste time and money seeking special advantages instead of building businesses or creating new jobs.
U.S. corporate tax rates, now 35 percent, are the highest in the developed world, compared to an average of 20 percent in Europe and 22 percent in Asia. The predictable – and perfectly legal – result: a wave of so-called “inversions,” with American companies forced to re-incorporate abroad to alleviate these stifling tax burdens that punish growth. President Barack Obama has moved to impose restrictions on companies’ ability to use untaxed offshore profits if they go through an inversion with new rules proposed last month – an unhelpful answer to the wrong question.
Just as the problem is clear, so is the solution: comprehensive tax reform that includes reducing rates for individuals and corporations without the government picking winners and losers. A flatter, fairer tax system with fewer deductions would promote economic growth and fiscal sanity.
Revenues lost from reducing tax rates would be recovered by closing tax loopholes. With businesses and individuals making investments based on economic considerations, not political mandates, the economy would grow, further boosting tax revenues. Corporate inversions would naturally grind to a halt.
For Republican senators and representatives, who are often besieged by the Tea Party on the right and the Democratic Party on the left, smart tax policy is smart politics.
Having spent much of my career working for “purple state” Republicans, from Sen. David Durenberger of Minnesota to Rep. Michael Castle of Delaware, I know how important it is to preempt primary challengers. By simplifying the tax code, promoting fiscal responsibility and replacing the crony capitalism of loopholes with the free enterprise of lower rates, mainstream Republicans can guard their right flank while doing what is right for the economy. Looking toward the general election, this would also inoculate Republicans against Democratic attacks, whether from the fiscally responsible center or the populist left.
Moreover, it would give Republicans in the Senate and House a historic legislative achievement to take to the voters in 2016, quieting the inevitable Democratic narrative of a “do-nothing Republican Congress.”
For Republicans – and also, perhaps, for those on the other side of the aisle and at the other end of Pennsylvania Avenue – comprehensive tax reform is an idea whose time has come. Speaker John Boehner (R-OH) has made it one of his five goals for growing the economy. Rep. Paul Ryan (R-WI), who is favored to become the next chairman of the tax-writing House Ways and Means Committee, has long championed it and now says it will be a top priority next year.
The Ways and Means Committee has already been working on the issue, giving the options to the Congressional Budget Office, which has already “scored” the fiscal implications of different approaches. Therefore, the next Congress will have a head start on considering reform when it convenes in January.
Raising hopes for bipartisan action, the chairman of the Council of Economic Advisers, Jason Furman, has said that President Obama “would love to sign a business tax reform bill.”
We haven’t seen much in the world of tax reform since President Ronald Reagan worked with a Democratic Congress in 1986 to enact bipartisan tax reform that lowered rates, reduced loopholes and led to long-term economic growth. Today the roles are reversed — but perhaps the time and the politics are right.
Michael Quaranta is a principal at the Podesta Group, a government relations and global public affairs firm. He was previously chief of staff for former Rep. Michael Castle (R-DE), financial services adviser to former Sen. David Durenberger (R-MN) and vice president of federal and state government affairs for Experian Information Solutions.
