The United States has the world’s largest and most diverse economy, built and powered by the indomitable American entrepreneurial spirit. Why don’t we have the world’s best, most economically competitive tax code?
The last meaningful reform to the IRS code was 31 years ago, but now there is the opportunity to pass real tax reform that encourages economic growth and creates more jobs and higher wages. We can accomplish this if we focus on allowing the free market to do what it does best — generate growth, create jobs, and increase prosperity for every American.
I witnessed this firsthand when I worked at the World Bank. We looked at the economies of developing nations like China and India. In these countries, the average annual per capita income back in the early 1990s was roughly $1,000, which was insufficient to cover even the most basic necessities. Today, that has risen to nearly $10,000, which allows over 2 billion people to meet their basic needs through the dignity of work.
This economic miracle was and is the largest welfare improvement in human history. Two countries shed top-down traditional, communist central-planning for the magic of markets and we are now close to feeding the entire world. It would be ludicrous to move in the opposite direction. Yet the temptation of elites, special interests, and cronies will always be to try to steal power from the people and return to patronage politics and government control.
Free markets are about more than just economics. Across the globe, countries with free-market economic systems not only see greater economic prosperity, but individual freedoms also begin to flourish — human rights, women’s rights, and political rights. Freedom is infectious. Giving individuals — and the businesses they own — the freedom to spend and invest money the way they see fit spurs economic growth, prosperity, and happiness.
It is easy for politicians to grandstand about the special projects they believe the taxpayer should subsidize, but there is very little evidence that government spending generates lasting economic growth.
For example, the Obama stimulus was a misguided attempt to create economic growth by picking winners and losers, and then doling out taxpayer dollars to favored donors. That is how we ended up with disasters like the green-energy company Solyndra that left taxpayers liable for $535 million in loan guarantees after it went bankrupt.
In contrast, tax cuts have a broad impact that positively affects consumers, mom-and-pop businesses, and large employers. But most importantly, they empower people to make their own decisions on how to spend and invest their money, and that “democratization” of the economy leads to better outcomes and lasting productivity and economic growth.
Right now, the U.S. has one of the highest corporate tax rates in the world. This makes it difficult for us to compete globally and places an additional burden on working men and women.
When analyzing the effect of reducing the corporate tax rate, many fail to recognize who pays the taxes. Corporations do not ultimately pay most taxes, they simply collect them from individuals and forward that money to the government. It is the average American who actually pays corporate taxes, either through higher prices, forgone wage increases, or lower returns on their retirement plans and mutual funds that own stock in those corporations.
While progressives on the left make utopian demands for minimum-wage increases to bring individuals out of poverty, a recent study found Seattle’s move to a $15 minimum wage likely hurts low-wage workers, with costs outweighing benefits by a ratio of three-to-one.
As opposed to raising wages by dictum, lower corporate taxes enable firms to keep and invest more of their revenue in equipment and expansion. Those investments increase productivity and that leads to real sustainable wage increases. In the real world, the way to successfully promote wage growth is by increasing productivity.
History makes the case that letting people decide how to invest their money leads to broad-based economic growth.
In the 1920s, tax rates were dropped from 70 percent to 25 percent, yet federal revenues rose dramatically. During the 1960s, Democratic President John F. Kennedy saw the power of supply-side tax cuts and generated 5 percent economic growth. And the Reagan tax cuts in the 1980s generated 4 percent economic growth that extended with lasting implications into the 1990s.
Tax reform is simply a common-sense policy Congress must pass. When we get people back into the labor force by lowering corporate and individual tax rates, the happiness and economic prosperity of our country will increase. I understand why frustration levels are high across both political parties, but we must get tax reform accomplished to grow the economy and to renew the American spirit.
Dave Brat, a Republican, represents Virginia’s 7th District in the U.S. House of Representatives. Contact his Glen Allen office at (804) 747-4073.