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Why the U.S. Needs Tax Reform NOW

When the president called for an overhaul of the tax system on the campaign trail, he stated clearly and unequivocally that the existing tax code is “outdated, unfair, and inefficient.”

“It provides tax breaks for moving jobs and profits overseas and hits companies that choose to stay in America with one of the highest tax rates in the world,” the president said. “It is unnecessarily complicated and forces America’s small businesses to spend countless hours and dollars filing their taxes. It’s not right, and it needs to change.”

If you think that quote is from President Trump, guess again—it’s the argument advanced by former President Barack Obama in 2012, when he called for reforming the tax code during his campaign for a second term in the White House.

Ultimately, Obama’s call for tax reform was stymied by Washington gridlock, but the 44th  president had it right five years ago when he emphasized the need to modernize the tax system.

His successor, President Trump, has picked up the mantle of fixing the tax system, and support for reform, at least in principle, has bipartisan appeal. In April, the president made a positive first step with an executive order aimed at identifying and reducing tax regulatory burdens.

So after years of well-intended promises but little progress, is the time ripe for real comprehensive tax reform?

At first glance, “tax reform” may sound like another feel-good government cause. But the reality is that the existing tax code isn’t working as it should—and that inefficiency is having a serious impact on job growth and the larger economy. Let’s take a closer look at the compelling case for reforming the tax system now.

The existing tax code is, to put it simply, a mess. The last time Washington policymakers took on comprehensive tax reform was 1986. In passing the Tax Reform Act of 1986, the Reagan administration and a Democratic Congress worked together to simplify the code by lowering corporate tax rates, streamlining the number of brackets and broadening the tax base.

But that was over 30 years ago. Since then, the tax code has gradually grown more complex, complicated and convoluted, like a garden overgrown with weeds. And as any gardener knows, regular weeding promotes healthy growth.

Today’s tax code is “almost twice as long as it was in 1985,” Scott Hodge of the non-partisan Tax Foundation notes. He writes that the federal tax code now totals more than 2.4 million words, along with an additional 7.7 million words of tax regulations put forth by the IRS. That leads to substantial confusion and inefficiency for business and taxpayers, who increasingly must rely on paid professional tax preparers to navigate the tax jungle. Which means that….

Complying with a poorly designed tax code costs a lot of money. The runaway growth of the U.S. tax system isn’t just inefficient—it’s expensive.

The Tax Foundation report notes that, based on estimates from the Office of Information and Regulatory Affairs, Americans spent 8.9 billion hours complying with IRA tax filing requirements in 2016, including 2.8 billion hours for U.S. business returns, at a cost to the economy of $409 billion per year. Simplifying the tax system to reduce those numbers will allow business and individuals to spend less time filing, and more time earning, investing and hiring.

It’s not about cutting taxes or hiking taxes—it’s about building a smarter tax system. Too often tax debates center around questions of tax cuts versus tax increases. How much should we tax, and who should pay? But a carefully considered approach to tax reform will focus on a different question: what could we do to make the tax system simpler, fairer and more oriented toward growth and job creation?

Tax reform would bring broad benefits to business, workers and the economy. Streamlining and simplifying the tax code would have cascading benefits. Making the U.S. tax code more competitive with tax policies in other countries would encourage more foreign investment in the United States, and corporations and small businesses could invest more in enhancing productivity which promotes job creation and higher wages. 

Passing tax reform would boost confidence in government. The nation’s capital has been trapped in a cycle of inaction and ineffectuality for too long, which has had a predictable effect on public confidence in government. For example, a recent Gallup poll found that a stunning 74% of Americans disapprove of the job Congress is doing.

How could leaders in Washington turn that around? Bipartisan action on tax reform would send a signal to the American people that the parties in Washington are focused on doing the work they were sent there to do. At a time of low and declining confidence in the institutions of American governance, it’s time to show results. Tax reform won’t be easy, but it could pay dividends in terms of boosting the economy and restoring confidence in Washington’s ability to govern.

Perhaps those arguments explain why tax reform enjoys strong support from American taxpayers. According to an August poll conducted by the American Action Network’s Middle Class Growth Initiative, a majority of respondents agree that taxes are too high, and an overwhelming 77% believe business tax reform “will positively impact economic growth and jobs or their own pocketbook.”

So what would a modernized, streamlined tax system look like? The key principles are that the tax code should promote savings and investment, enhance economic opportunity and lower the tax burden for American businesses competing in a global marketplace.

Payson Peabody is Managing Director, Tax Counsel and Associate General Counsel with the Securities Industry and Financial Markets Association (SIFMA).