As Congress turns its focus to resolving the fiscal cliff - the end-of-the-year deadline after which deep cuts in spending and increases in tax rates for all earners take effect - there is much disagreement on how to bring down the deficit in a responsible way without harming our economy. The question of tax rates remains one of the largest sticking points to the debate. Should tax rates increase for one group more than another group? Do we need to increase federal revenue? Should some businesses be hit harder than others? Do we need to increase tax rates in order to increase revenues? While both sides need to be reasonable and seek common ground, these questions miss the point. We don't need higher tax rates to increase revenue, we need better tax policy.
The federal tax code is so difficult and complicated it is slowing an already weak economic recovery. Everyone from the average taxpayer to multinational corporations struggles with our inconsistent and complicated tax code, which is comprised or more than 10,000 pages of ever-changing laws and regulations and costs more than $160 billion to comply with.
The failure to adopt a permanent tax code with stable statutory tax policy creates unnecessary burdens. Tax rates have been scheduled to increase sharply in three of the last five years, requiring the enactment of repeated temporary extensions. The latest extension of tax rates will expire on January 1, 2013 and will result in the largest tax increase in American history if Congress does not act. Just the process of temporary extensions has stunted economic growth.
The President and Democrats want to raise tax rates on individual income above $200,000, and couples earning more than $250,000. While this might make for good political fodder, it does not make good policy. I have yet to hear anyone argue raising tax rates will help grow our economy, create jobs or balance our budget. In fact, a study by Ernst & Young found the Democrat plan would raise taxes on nearly 1 million small business owners and will strip our economy of more than 700,000 jobs.
History has shown the best way to raise revenue is through economic growth and private sector job creation. For example, when the American economy was stronger in 2007, the federal government brought in about 18 percent more tax revenue than 2009 despite no change in the tax rates. The key difference in revenues between the two years was the level of economic growth and job creation which was dramatically lower in 2009.
We can fix our broken tax code to create a fair system of taxation and to make the U.S. a more competitive place to do business. Such reform, which I favor, would in turn generate more tax revenue by creating more taxpayers and taxable income, not through higher tax rates.
To accomplish this goal the vast web of credits, deductions, exemptions, and other provisions mostly enjoyed by the wealthy and the politically-connected should be reviewed and many should be closed. Closing loopholes will not only generate revenue, it will simplify the code, possibly allow rates to be lowered and make our economy more competitive in an increasingly global economy.
As a member of the House Committee on Ways and Means, which is charged with rewriting the tax code, my colleagues and I have been working for the last two years to establish basic principles for tax reform. I look forward to continuing this work, and I am optimistic we can enact tax reform during the next Congress.
I am under no illusion the task will be easy, and I recognize there is not enough time to complete comprehensive tax reform before the end of this year. However, by agreeing to a framework for tax reform to ensure reform is completed next year, and agreeing to significant spending cuts and reforms, we can avert the fiscal cliff in a balanced way and set the stage for real economic recovery and growth.