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Thursday June 21, 2018

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Potential Benefits of Tax Reform

In the United States there is general agreement that the current tax system is too complex and outdated. Members of the House and Senate from both parties agree that America needs a new tax system.

The last major tax reform was in 1986. A Republican President and a Democratic Chairman of the House Ways and Means Committee were able to build bipartisan support for comprehensive tax reform. They lowered the tax rates and also reduced various deductions and credits.

On June 7, Douglas Holtz-Eakin, President of the American Action Forum, testified before the House Budget Committee. He reviewed the prior tax reform three decades ago and noted, "If history is any guide, a 1986 style reform offers faster economic growth. This is borne out by retrospective analysis of TRA that found that the 1986 tax reform produced about one percentage point higher growth over a long period."

Because of this history of significant economic growth during the two decades following passage of the 1986 tax act, many economists and commentators believe that it is time for another major overhaul of the tax system. While the 2017 economy differs from 1986, there still could be major economic benefits.

Holt-Eakin notes, "Highly respected economists David Altig, Allen Auerbach, Lawrence Kotlikoff, Kent A. Smetters and Jan Walliser simulated multiple tax reforms and found GDP could increase by as much as 9.4% from tax reform."

These economists simulated a much simpler tax system than the current Internal Revenue Code. They eliminated all deductions and credits and assumed a flat tax. The economic increase was approximately 4.4% over a decade. This increase in the economy also included creation of a substantial number of new jobs.

The House, Senate and White House continue to develop a comprehensive tax reform plan. Speaking to the media on June 2, National Economic Council Director Gary Cohn stated that the White House plan was in process. He noted, "We will have a very detailed, draft tax plan to deliver to Congress" by the end of the summer recess.

Editor's Note: Comprehensive tax reform is quite difficult. Some deductions and credits will be reduced. Even with an effort to keep the bill revenue-neutral, some taxpayers will pay less and others will pay more. However, with these known potential improvements in the economy, there is a bipartisan recognition that tax reform would be helpful for the nation. It could increase economic growth and employment over the next decade.

Published June 9, 2017

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