Tax Reform Needed for a Stronger America

Posted November 3, 2014 at 5:06pm

The United States is once again at war. As of Aug. 8, our military has been mounting drone and warplane attacks on the Islamic State terror group, also known as ISIL or ISIS. Support has been strong and bipartisan, but there is growing concern because the White House has not said how much this effort will cost, nor how it will be paid for. Surprisingly, tax reform could well provide the means to fund it.

The war against ISIL has cost more than a billion dollars so far. In late September, Defense Secretary Chuck Hagel told reporters the military is already spending $10 million a day on operations. Some estimates suggest the war could cost as much as $40 billion a year.

It’s clear that winning the war against ISIL will not be easy and will not be cheap.

It so far has been paid for through the Overseas Contingency Operations account in the Department of Defense budget. Fiscal conservatives rightfully fear the war will be paid for through increased deficit spending and perhaps higher taxes as well.

This simultaneous debate over war funding and taxation is not a coincidence but an opportunity. Instead of increasing taxes or adding to the deficit, Congress should pass comprehensive tax reform.

There is growing bipartisan recognition that America’s byzantine corporate tax system needs serious overhaul. The U.S. statutory corporate tax rate of 35 percent is the highest in the world (well above the 25 percent Organisation for Economic Co-operation and Development average), placing the country at a comparative disadvantage in the global economy. A 2013 Ernst & Young study found the country’s high corporate tax rate depressed gross domestic product growth by 1.2 percent to 2 percent, while also lowering wages by 1.2 percent.

On Sept. 23, Bill Clinton — the man who raised corporate taxes to their current levels — told CNBC that corporate taxes were too high and said there was agreement from “100 percent of the people, from Democrats, independents and Republicans” that they need to be lowered.

Tax reform, then, is both an economic necessity to grow the economy and a national security imperative to fund the war against ISIL. The Ways and Means Committee’s Tax Reform Act of 2014 shows how tax reform can provide a fiscally responsible means to fund the war. It calls for both lowering tax rates and closing loopholes, which unsurprisingly has resulted in it being attacked by vested interests on both the left and right.

The nonpartisan Joint Committee on Taxation calculated that the Tax Reform Act would be revenue neutral. However, the standard calculations of the JCT and the Congressional Budget Office rely on static scoring, which doesn’t take into account the likely impact of a governmental action on the behavior of companies and individuals. In contrast, dynamic scoring reveals the real economic impact, which in the case of the Tax Reform Act would drive GDP growth and as a result increased federal revenue.

The power of dynamic scoring is revealed by the example of the Global Positioning System. When Ronald Reagan made GPS technology freely available in 1983, the CBO’s static analysis would have scored the value of this action as zero — think about that the next time you take out your smartphone to find the nearest Starbucks. That’s why the House this year approved a bill that would require the CBO to use dynamic scoring to determine the effect of proposed legislation on the economy.

So when the JCT used dynamic scoring to evaluate the Tax Reform Act of 2014 — this time taking into account the growth in employment and wages that would result from lower taxes — it found that it would generate additional revenue of up to $700 billion between 2014 and 2023.

Here it is: the money we need to win the war against ISIL terrorism. Congress could fund the war effort by specifically designating that a percentage of the $700 billion raised through tax reform go toward military operations in Iraq and Syria. That’s a cause that both Republicans and Democrats should enthusiastically support. And, of course, the nation as a whole would benefit from tax reform that would boost the economy and keep jobs and businesses in the United States. It’s time for Congress to act on tax reform.

Sarah Chamberlain serves as the chief operating officer and chief financial officer for the Republican Main Street Partnership.