How Do You Create Sustainable Economic Growth?

September 16, 2013

In a discussion on Meet the Press about the economic issues that currently face the country, former Treasury Secretary Hank Paulson said that while things are better than they were when the financial crisis first struck, with only 2 percent growth, “we’ve still got some problems we need to address.”

One of the problems he mentioned is the current tax code.

“[W]e need a new tax system,” Paulson said on the Sunday show.

Paulson is right. But before we go and scrap the code and replace with something new, it’s important we know what we want the new system to do. Fellow guest Maria Bartiroma knew the right question to ask to help find the answer.

She said the question we should look to answer is: “How do you create sustainable economic growth?”

This question should be our guide for tax reform, because if done correctly, tax reform can get us to growth.

Economic growth is so important because it solves so many issues that countries face. It creates jobs, improves quality of life, increases wages, and leads to greater government tax revenues.

A tax system that is conducive to economic growth follows the Tax Foundation principles of sound tax policy.

It should be simple, so taxes are easy to comply with and understand.

It should be transparent, so taxpayers know exactly what taxes they pay and why.

And, perhaps most importantly, it should be neutral. Taxes should raise necessary revenue and not alter individual or business decisions. The current tax code is non-neutral in many ways, but most damaging to growth is its bias against savings and investment. Then when we get this type of code, let's not change it everyday.

A tax code that follows these principles will free savings and investment to grow and allow businesses and individuals to interact freely, unleashing higher productivity and economic growth.

As Congress tackles tax reform this fall, they should be sure to have economic growth at the front of their mind.

And, as the tax reform discussion heats up, we should remember that every time we evaluate a tax reform proposal our questions should be: what will this do for economic growth?

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