What Can a Donut Shop Teach Us about Tax Reform?

August 19, 2013

New Video Offers Economic Insights

Washington, D.C., August 19, 2013—Running a donut shop and reforming the federal tax code may sound like dramatically different jobs, but selling tasty treats can offer us lessons for the larger task ahead, according to a new video released today by the Tax Foundation.

“When a business raises or lowers its prices, the owners know that it’s going to have an immediate impact on sales and profits, and they plan for that change” said Tax Foundation president Scott Hodge. “But in Washington today, we have forgotten that simple lesson. When it comes to raising or lowering tax rates, government officials act as though the rest of the economy will stay frozen in place.”

When Congress considers potential tax changes, official sources like Congress’ Joint Committee on Taxation assume that no matter how different the tax code is in the future, the economy will continue to behave as if nothing had happened – Americans will keep working and investing in the exact same way. These “static” estimates produce a distorted idea of the results that changing the federal tax code will actually produce.

“To make better policy, lawmakers need better information,” added Hodge. “We can’t keep pretending that tax changes exist separate from the rest of the economy. We need to know what the impacts are going to be on jobs, wages, and capital formation – before we adopt any new tax reform ideas.”

In “The Economics of Tax Reform: Lessons from the Donut Shop,” the Tax Foundation explains that higher tax rates tend to reduce the number of jobs and the amount of money available for investment. These basic economic inputs of labor and capital in turn affect how successful a small business like a donut shop will be. In a larger, growing economy, we expect to see more bakers being hired and more ovens being purchased, for example.  

The video is part of a larger project on Taxes and Growth, which includes a sophisticated computer model. The Tax Foundation’s Dynamic Macroeconomic Tax Simulation Model analyzes the effects of potential tax changes economy-wide. Most recently, the Tax Foundation used data from the model to produce an 11-part series on federal tax expenditures titled The Economics of the Blank Slate.

The Tax Foundation is a nonpartisan research organization that has monitored fiscal policy at the federal, state and local levels since 1937. To schedule an interview, please contact Communications Manager Richard Morrison at 202-464-5102 or morrison@taxfoundation.org.

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