HUTCHISON: Reform the tax system


WASHINGTON – Pundits, economists, politicians and Americans from every walk of life have been discussing the rapidly approaching fiscal cliff that the country is poised to go over on January 1st. People are understandably both scared and frustrated.

Recently, I wrote about the effects of higher tax rates on the small businesses we depend on to create new jobs. Raising tax rates on these job creators would be bad for our ailing economy and depressing news for the more than 20 million Americans who are seeking full-time work.

Fortunately there's a better way.

It has been proven time and again that lowering taxes for everyone results in higher revenues. If we enact lower, flatter tax rates for everyone, we would accomplish the goal of a fairer, simpler tax system, which would be a catalyst for faster economic growth. Small businesses have historically invested in their companies and grown their businesses – resulting in increased hiring.

The facts about the effects of lower tax rates on economic growth seem to have been forgotten during the past four years. In fact, every major tax reduction program since the Kennedy Administration's tax cuts has been followed by a substantial increase in revenue and solid economic growth.

During the Reagan administration, when income tax and capital gains tax rates were reduced dramatically, not only did our economy grow rapidly (more than double the rate of the previous four years), federal tax revenues increased by 60 percent. At the same time, the share of federal taxes paid by the top 10 percent of incomes increased.

Likewise, the 2003 Bush tax cuts were followed by 52 consecutive months of healthy economic growth and generated a massive increase in federal tax revenue. From 2004 to 2007, federal tax revenue increased by $780 billion (44 percent), the largest four-year increase in American history.

Four years after the start of the worst economic meltdown since the Great Depression, we are teetering on the verge of returning to recession, and the threat of higher taxes is partly to blame. Survey after survey of business owners and managers in the past year revealed that they are holding back on expansion and new hiring because they don't know what to expect from Washington, and they're afraid that much higher taxes are what's coming.

Nevertheless, President Obama's plan is to increase taxes by $1.6 trillion over the next decade with much of this new revenue to be taken from smaller businesses.

The president says he's willing to talk about fundamental tax reforms … later. But he is insisting on immediate tax increases on small businesses and those who make more than $200,000 ($250,000 for joint filers).

Most Americans understand that raising taxes is bad for economic growth. Members of Congress understand this, too. Earlier this year, Congress considered President Obama's 2013 budget plan which was (no surprise) based on raising taxes by about $1.6 trillion. The surprise was that not a single Member of Congress in either political party voted for the president's budget.

The president is now trying to force a false choice on Congress and our country. Either Congress votes to raise taxes right away on those making more than $200,000 – including small businesses – or he will allow higher taxes to take effect for everyone on January 1st. This would help to lock in historically high levels of federal spending for years to come. Unfortunately, it would also be a major setback for our real critical national priorities – the economy and out-of-control deficits.

There's still time for the president and Congressional leaders to avoid taking the country over a financial cliff. This is also the right moment for a fundamental restructuring of our tax system that will energize our economy. But the window of opportunity for boosting economic growth is closing quickly.

This column was written by U.S. Sen. Kay Bailey Hutchison.