Senator John Thune
America stands at a crossroads. We face near-record unemployment, a stagnant economy, and a structural fiscal imbalance that threatens the well-being of Americans today as well as future generations.
President Obama recently outlined his solution: a Stimulus 2.0 consisting of short-term, temporary tax incentives and new spending, paid for with higher taxes on entrepreneurs and job creators.
I disagree with the president's approach. Rather than new short-term half measures, Americans need permanent reforms that provide certainty. America's entrepreneurs need to plan and invest for the future. And our financial markets need to know that Washington is serious about tackling our federal deficit and putting our nation's finances on sound footing. There are many steps we must take, but perhaps none is more crucial to our nation's future prosperity than fundamental tax reform.
Comprehensive tax reform can do more than any other single step to make America, and American businesses, more competitive in the global economy, thus raising U.S. wages and our standard of living over time. Additionally, tax reform can help to address our ever-expanding budget deficit by unleashing economic activity that will raise federal tax receipts, albeit at lower tax rates.
Consider the example of the Tax Reform Act of 1986, the last time our government adopted serious tax reform. Through leadership and political courage, President Reagan made possible a tax overhaul that lowered tax rates substantially, reducing the top marginal rate from 50 percent to 28 percent and significantly broadening the tax base. Our nation experienced continued prosperity and strong economic growth following these reforms and federal tax revenues nearly doubled during the 1980s. While the national deficit hit a high of 6 percent of Gross Domestic Product in 1983, it fell to 3.1 percent by 1988, after the 1986 reforms had taken effect.
The case for pro-growth tax reform is even stronger today. Our tax code has grown considerably and become a complex maze of special interest provisions and "temporary" tax measures. But America now faces much more intense global competition for jobs and investment than it did 25 years ago. Today, multinational corporations can place the next cutting-edge research and development or manufacturing facility anywhere from Bangalore to Sao Paolo to Shanghai. Unfortunately, our tax code still operates as if this competition for jobs and investment is irrelevant.
America's combined state and federal corporate tax rate is the second-highest in the developed world, topping out at nearly 40 percent. Even Russia, at 20 percent, and China, at 25 percent, are lower. Since 1998, the average corporate tax rate of advanced economies has dropped by 19 percent, while the U.S. rate has risen by 1 percent.
The U.S. has also lost ground as other countries have modernized how they tax earnings from outside their borders. Among the top eight economies in the world, only the U.S. taxes its businesses on their income earned outside of the country, above and beyond taxes paid to the country in which it was earned. This handicaps American businesses competing with foreign companies in the global market. By some estimates, as much as $1.5 trillion in earnings by American companies could be reinvested in our economy if our tax system did not impose a double tax.
Enacting fundamental tax reform in the current environment in Washington will not be easy, just as the 1986 reform was prolonged and contentious. It will require the same ingredients that were necessary 25 years ago, but that are today in short supply: presidential leadership and a willingness by Congress to make some difficult decisions. The good news is that we've done it before. For the good of the country, we can and must find a way to do it again.
Senator Thune serves on the Agriculture, Nutrition & Forestry Committee, the Budget Committee, the Commerce, Science & Transportation Committee, and the tax-writing Finance Committee. Since 2009, Thune has also served as the Chairman of the Senate Republican Policy Committee. A native of Murdo, South Dakota, he received his undergraduate degree at Biola University and his Master's degree in Business Administration from the University of South Dakota.