Missouri is an appropriate backdrop for President Donald Trump to launch his tax reform push this week, and not only because of his lopsided victory here. For too long, both Missouri and the U.S. as a whole have been hobbled by outdated tax codes that prioritize special interest carve-outs and corporate welfare over laying the foundation for a robust economy.
America has been stuck in a low economic growth gear for over a decade with declining small business formation, millions of workers left on the sidelines, and over a trillion dollars parked overseas. With the stakes so high, we must seize this generational opportunity to overhaul our dysfunctional tax code.
One of the main Republican arguments for tax cuts is that they put more money in the hands of the private sector instead of government. As a lifelong Republican and free-market conservative, I strongly agree. However, this Keynesian argument actually diverts attention from the far more damaging effect of taxes: how they encourage individuals and businesses to make important economic decisions based on incentives in the tax code instead of on underlying fundamentals. For this reason, tax reform is not just about how much we tax, but also about how we tax.
To remedy this situation, we need a tax code that is simple, transparent, efficient, equitable and predictable. Currently, our complex and opaque tax code imposes heavy compliance costs — particularly on small businesses that cannot afford an army of lawyers — and makes it easy for insiders to tilt the tax code in their favor. Politicians love to conceal the cost of government through hidden taxes, but it is important to remember that the burden of any tax always falls ultimately on regular people and not just CEOs, whether through higher prices, smaller paychecks, or lower 401(k) returns.
Ever since Adam Smith, economists have made the argument that, in the absence of a clearly identifiable market failure (which frequently arises because of, rather than in spite of government), the free market allocates resources according to their best uses by aligning private incentives with the social good. By contrast, our inefficient tax code discourages marriage, risk-taking and entrepreneurship while encouraging debt accumulation and monopoly-inducing mergers — hardly the formula for a robust economy. Because tax inefficiencies rise more rapidly with rates than with the base, we must pursue the lowest rates possible applied to the broadest base possible.
Conservatives must also refuse to cede ground in the tax equity debate. As we have seen, liberals love discussions of “tax fairness” because it allows them to pivot to the politics of class warfare and envy. However, how can they defend taxing married couples at a higher rate than cohabiting couples or taxing big corporations like Amazon at a lower rate than mom and pop shops? Unfortunately for liberals, these maladies are an inevitable byproduct of using the tax code for social engineering and redistribution. Conservatives must provide an alternative by standing for tax reform that creates a level playing field.
Lastly, in an age of high-pressure quarterly reports, it is important to remember that many of the most important economic decisions are actually made with long-term horizons in mind. Thus, we need a stable, predictable tax system to ensure that people can make reliable forecasts for their families and businesses. We should make big reforms now that also reduce the temptation for politicians to tinker later.
By following these principles, we can reinvigorate the American economy, put people back to work, and leave a legacy of greater opportunity, not stagnation, to the next generation.
Aaron Hedlund is an economics professor at the University of Missouri-Columbia.