Economic growth must be a priority for tax reform

There are several factors that businesses consider when deciding where to invest, but it’s no secret that one of the most important considerations is taxes. Nations around the world understand this, and many try to define their code in a way that will attract investment, bringing jobs along with it. For many countries, that’s been one of their key selling points in a global competition to attract successful businesses. Singapore, for example, is a small country consisting primarily of its major city and capitol. Whereas America was blessed with many geographical advantages, and has a large market and workforce, all of which are some of the factors that help drive investment to the United States, Singapore is much smaller and needs to create some of its own advantages. It has done so through its tax code, and it’s helped the country grow into one of the greatest economic success stories in Asia.

An overly burdensome tax code does the opposite, driving out businesses that would otherwise be investing in America. Before the Tax Cuts and Jobs Act (TCJA) of 2017, the United States had an anti-competitive tax code that was doing exactly that. The corporate tax rate was higher in the United States than all 38 advanced economies that make up the Organization for Economic Co-operation and Development (OECD), beating out countries such as France, Denmark, and Sweden. Including all the world’s countries, we ranked 4^th for highest corporate tax rate.

Between 1983 and 2015, 60 companies “inverted,” or moved their headquarters to another country and became a foreign company. In the couple of years leading up to 2017, this trend was intensifying. By reforming the tax code from anti-competitive to pro-growth with the Tax Cuts and Jobs Act, that trend was stopped in its tracks. Not a single company inverted in the years following TCJA. Further, we saw many companies bring back assets that they had already moved offshore. Companies brought back intellectual property, cash, jobs, and research in response to the new tax landscape. In the years following TCJA, real median household income increased by $5,000, wages rose by 4.9%, 6 million people were lifted out of poverty, and the economy grew faster than the nonpartisan Congressional Budget Office (CBO) expected.

One recent study found that because of the Tax Cuts and Jobs Act, investment in the United States by businesses increased by roughly 20%. That’s an astonishing jump that reflects just how badly the previous tax code was holding back our economy. This economic growth was also reflected in the amount of corporate tax revenue the United States collected. Despite reducing corporate tax rates from 35% to 21%, corporate tax revenue increased in the years following TCJA. In 2017, before the Tax Cuts and Jobs Act took effect, the federal government collected $297 billion in corporate tax revenue. In 2021, after the corporate tax rate had nearly been cut in half, the federal government collected $372 billion in corporate tax revenue, significantly higher than just a few years before – even with a significantly lower rate. For 2024, CBO had projected that the previous tax system would generate $405 billion in corporate tax revenue. Under the new, lower corporate tax rate, CBO now projects to collect $569 billion in corporate taxes.

Why? Because even though the rate is lower, more enterprises now want to do business in America. We lowered the tax rate but broadened the tax base.

Understanding this vital connection between taxes, economic growth, and revenue is key to understanding both how we can remain the most successful economy in the world, and how we can reverse the disastrous trajectory of the national debt. There are several things that need to happen to get this crisis under control, and while cutting wasteful government spending is the most important piece of the puzzle, economic growth needs to be part of the consideration as well. What Democrats have failed to realize is that the crisis can’t be resolved simply by hiking taxes, because many taxpayers will simply leave if we create irresistible incentives for them to do so. That creates a lose-lose-lose situation, where companies get taxed out of town, Americans lose jobs, and deficits balloon.

At the end of 2025, much of the tax code as we know it will expire, including many of the most important pro-growth provisions of the Tax Cuts and Jobs Act. If nothing is done, taxes will go up across the board for individuals, families, and businesses. American farmers would see a $4.5 billion tax hike. If left to the Democrats, low taxes and economic growth are likely to be ignored in favor of higher taxes and more reckless spending, with disastrous consequences for jobs, wages, and investment. If President Biden’s slew of tax proposals outlined in his Fiscal Year 2025 budget are implemented, for example, the Tax Foundation expects that long-run GDP will decline by 2.2%, wages will decline by 1.6%, and we would lose nearly 800,000 jobs. With $7 trillion in new taxes proposed by the Biden budget, a family of four earning $75,000 would see their taxes increase by $1,500, main-street businesses would see a federal tax rate of 43.4%, and farmers would face a minimum tax hike of $8.9 billion.

As we work on what the tax code should look like after 2025, economic growth needs to be a top priority. According to the CBO, a half of a percentage point difference in productivity growth from the baseline results in a range in the debt-to-GDP ratio from 140% to 234% by 2052. Currently, our debt-to-GDP ratio is at 166%. A long-term shift in the trajectory of our debt depends a great deal on the growth of the economy. That’s why it’s critical that we build on our pro-growth tax reforms to ensure that economic growth continues and accelerates for the good of our families, farmers, and businesses.

This op-ed was originally published in the Washington Times on April 29, 2024.