Tax Reform and Cost Recovery

January 24, 2014

Tax Foundation Senior Fellow Stephen J. Entin with his views on cost recovery and the current status of tax reform efforts in Washington.

The current tax reform efforts in both the House and the Senate appear to be focused on worsening the depreciation allowances in order to raise money to lower the corporate tax rate and to lower other tax rates. These sectors are already hit by inadequate depreciation allowances, so the capital intensive sectors would be facing, in fact, a higher tax burden in order to lower everyone else's taxes, creating an even bigger distortion and chasing away even more blue collar jobs.

I think this is a very poor way to fund fundamental tax reform. We'd do a lot better for the population by trimming the growth of government spending, possibly accepting a small near term tax reduction to get the country growing again, and then having the higher levels of employment and income and prosperity generate revenues down the road. That's the approach John Kennedy took. He cut the corporate tax rate, and he accelerated depreciation, and he even threw in an investment tax credit. The economy boomed, the revenue loss was absolutely negligible, and we had a good strong economic rebound until Lyndon Johnson raised tax rates by ten percent across the board to pay for the Vietnam War. We do not have to make this kind of a trade-off to pay for fundamental tax reform. It's the wrong way to go.

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