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GDP and the need for Tax Reform

The U.S. Department of Commerce's Bureau of Economic Analysis updated their 1st quarter estimate of the Gross Domestic Product (GDP) yesterday, writing:

"Real gross domestic product -- the value of the goods and services produced by the nation’s economy less the value of the goods and services used up in production, adjusted for price changes -- increased at an annual rate of 0.8 percent in the first quarter of 2016, according to the "second" estimate released by the Bureau of Economic Analysis. In the fourth quarter, real GDP increased 1.4 percent."

We growled about the 0.5% increase in the GDP on May 1, 2016, noting that the economy started the year badly. In addition, we've growled about the nation's regulatory burden here, here and here. Not to mention growling about Uncle Sam, Esq.'s legal army of 25,060 on May 2, 2016 and the December 23, 2015 Growls about the retreat of economic  freedom.

Consequently, Raymond Keating's May 20, 2016 column, posted at Real Clear Markets, pointing out that tax reform and investment are key to small business success, was indeed welcome news. According to Keating, chief economist for the Small Business & Entrepreneurship Council (SBEC):

"Capitol Hill is waiting with anticipation for House Ways and Means Committee Chairman Kevin Brady (R-Texas) to release his tax reform blueprint sometime next month. With a bad economy further slowing, as noted in the latest release on GDP, the first serious step for tax reform will be most welcome.

"And given that this recovery has so badly under-performed due to a lack of sufficient private-sector investment, a commitment to comprehensive tax reform that enhances incentives for entrepreneurship and investment is vital.

"Consider a recent report from the American Council for Capital Formation (ACCF) that highlighted a disturbing falloff in capital formation, that is, in plant, equipment, technology and so on. When it comes to the United States' recent track record, we don't stack up well against our global competitors. According to ACCF, "Domestic capital formation not only declined over time, but compared unfavorably relative to our top ten trading partners. . . . the U.S. [is] lagging behind all countries except the U.K. in gross fixed capital formation as a percent of GDP for 2007-2014 period."

On Wednesday, May 25, Scott Hodge, president of the Tax Foundation, provided the Foundation's perspectives on the need for tax reform in testimony before the Ways & Means Subcommittee on Tax Policy. Here's the introduction from his testimony:

"There are many reasons to reform our tax code, but the cost of tax complexity to our nation’s economy should be near the top of that list.

"Over the last century, the federal tax code has expanded dramatically in size and scope. In 1955, the Internal Revenue Code stood at 409,000 words in length. Since then, it has grown to a total of 2.4 million words: almost six times as long as it was in 1955 and almost twice as long as in 1985.

"However, the tax statutes passed by Congress are only the tip of the iceberg when it comes to tax complexity. There are roughly 7.7 million words of tax regulations, promulgated by the IRS over the last century, which clarify how the U.S. tax statutes work in practice. On top of that, there are almost 60,000 pages of tax-related case law, which are indispensable for accountants and tax lawyers trying to figure out how much their clients actually owe.

"Tax complexity creates real costs for American households and businesses, starting with just the time it takes us to comply with the tax code. According to the latest estimates on Reginfo.gov, Americans spend over 8.9 billion hours complying with IRS tax filing requirements, equal to nearly 4.3 million full-time workers doing nothing but tax return paperwork. To put that in perspective, 4.3 million is greater than the populations of 24 U.S. states.

"Put in dollar terms, those 8.9 billion hours add up to more than $400 billion each year[1] in lost productivity, or greater than the gross state product of 36 states.

"Tax complexity, and the fear of making mistakes, motivates about 62 percent of all taxpayers to use tax return preparers, but the percentage climbs to about 73 percent for the poorest Americans claiming the EITC.

"But tax complexity creates other costs besides our lost time. Many of the most complex features of the tax code distort individual and business behavior in numerous ways that leads to long-run economic harm. And we can measure that economic harm using the Tax Foundation’s Taxes and Growth (TAG) Macroeconomic Tax Model.

"To illustrate the tax code’s harmful economic effects, I’ve selected a number of examples from the Tax Foundation’s forthcoming Options for Reforming America’s Tax Code. The Options book will contain nearly 100 specific policy changes to the individual and corporate tax code that have been scored with the TAG model. Each “Option” will include an estimate of the policy’s economic effects (such as on GDP, wages, and jobs), revenue effects (measured conventionally and dynamically), and the distributional effects (also measured conventionally and dynamically)."

Hodge's testimony is worth reading in its entirety. Although 10-pages long, it's well-worth spending the time to understand the basics of tax reform. Here's his conclusion:

"A few years ago, the National Taxpayer Advocate named tax complexity the number one issue facing American taxpayers. In addition to robbing us of 8.9 billion hours of our lives complying with its Byzantine rules, our complex tax system punishes success and hard work, thus, robbing the economy of its ability to create jobs and better living standards.

"Using the Tax Foundation’s Taxes and Growth (TAG) Macroeconomic Tax Model, we are able to measure and quantify the cost of complex tax provisions on GDP, investment, and jobs. We find that the complexity caused by measures designed to make the tax code more progressive shrink the economy and kill jobs. We find that the complexity caused by tax policies to help the poor can discourage work and shrink wages. We find that the extremely complex corporate income tax—from its high rate, badly designed cost recovery systems, and twin layers of taxation—leads to less investment, fewer jobs, and a smaller economy.

"Finally, by scoring a wide variety of tax reform plans with our TAG model, we learned that there are many valid ways of ridding the tax code of its worst parts and creating a tax system that boosts economic growth, creates jobs, and lifts living standards."

As Keating pointed out in his column for RealClearMarkets, the Ways & Means Committee will be releasing his blueprint for tax reform next month. Speaker Paul Ryan repeated that promise today while a guest on Larry Kudlow's radio program today (WMAL 105.9 FM).

As we noted in yesterday's Growls, jobs and the economy continue to rank at the top of the most recent Gallup poll, published May 18, 2016. To talk about jobs and the economy, the political class must talk about tax reform and reducing the regulatory burden, among other basics in order to get the economy moving. So, take a few moments to write your member of of Congress to find out their position(s) on tax reform. Contact information is available at the Library of Congress' Thomas website (use left-hand column). Taxpayers living in Virginia's Arlington County can contact:

  • Senator Mark Warner (D) -  write to him or call (202) 224-2023
  • Senator Tim Kaine (D) -- write to him or call (202) 224-4024
  • Representative Don Beyer (D) -- write to him or call (202) 225-4376

Ask for a reply. And tell them ACTA sent you.

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