Issue Position: Lower Taxes

Issue Position

America's tax rate is too high and the biggest obstacle to U.S. competitiveness is tax complexity. With 73,954 pages of "2013 US Federal Tax Code", the burden of red tape is overwhelming. America must radically reform the tax treatment of business as well as individuals.

Lowering taxes can have a number of benefits. If consumers are able to pay less for products due to a lowering of the sales tax, they will be encouraged to spend more money. If income taxes are lowered, people may be encouraged to work harder, thereby increasing productivity. And, if corporate tax rates are lowered, businesses may be encouraged to produce more products and offer more services.

High tax rates and complicated tax regimes hurt growth. Overall growth is also higher with lower taxes and better collection. And with tax incentives aligned to encourage work, more firms and more jobs are created. One study shows a cut of one percentage point in corporate tax rates is associated with up to a 3.7 percent increase in the number of firms and up to 1.1 percent higher employment.

High tax rates and complicated tax regimes encourage tax evasion. Complicated tax systems can lead to high evasion, even when rates are low. A better way to meet revenue targets is to encourage tax compliance by keeping rates moderate.

High tax rates can reduce tax revenue. High tax rates do not always lead to high tax revenues. Between 1982 and 1999, the average corporate income tax rate worldwide fell from 46 percent to 33 percent, while corporate income tax collection rose from 2.1 percent to 2.4 percent of national income, Russia's corporate tax rates fell from 35 percent to 24 percent, and a simplified tax scheme lowered rates for small business. Yet tax revenue increased by an annual average of 14 percent over the next three years. Albania's corporate tax revenue rose 21 percent after the rate was cut, while in Moldova it jumped 28 percent and in Latvia, 37 percent. In Romania, budget revenues grew 8 percent in real terms in the first quarter of 2005 relative to the same period in 2004, despite a new flat tax.

Low-tax systems reduce corruption. Simplifying the tax regime by reducing tax rates and eliminating exemptions is the main way to reduce corruption in tax administration. Georgia, which introduced major reductions in tax rates and simplifications to the tax system in 2004, has seen a drastic fall in perceived corruption of tax officials. In 2005 only 11 percent of surveyed businesses reported that bribery was frequent, down from 44 percent in 2002. That was the sharpest drop in perceived corruption among the 27 transition economies. Romania, another major reformer in 2004, and Slovakia, which introduced large tax reforms in 2003, also saw falls in perceived corruption: from 14 percent to 8 percent of surveyed businesses and from 11 percent to 5 percent, respectively.

Ever since the Reagan tax cuts triggered a global shift toward lower tax rates, the evidence in favor of better tax policy has become stunning. But the international bureaucracies have been hold-outs. Indeed, the International Monetary Fund published a sloppy and quickly discredited paper attacking the flat tax. The Organization for Economic Cooperation and Development may be even worse. This Paris-based bureaucracy actually has an anti-tax competition project that tries to penalize nations with low tax rates. The United Nations, meanwhile, has a crazy idea for global taxes.

TheWorld Bank has broken ranks with the other international organizations and decided to accept real-world evidence about the benefits of low tax rates and fundamental tax reform. It even endorsed Laffer Curve analysis because of the overwhelming evidence that low tax rates result in more taxable income.

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