Tax reform: challenges and opportunities.

• Author: Bernard, David L.
• Position: President's page

In mid-September, I had the honor of representing Tax Executives Institute at a congressional hearing on fundamental tax reform. The specific focus of the September 20 hearing before the Senate Committee on Finance was business tax reform, and the other witnesses (including former IRS Commissioner Charles Rossotti, who served on the President's advisory panel on tax reform) and I were asked to address the objectives of the tax system, the deficiencies of the current Code, and options for reform.

TEI's testimony is reprinted elsewhere in this issue, but I want to discuss briefly the four straightforward principles that the Institute identified as essential to successful tax reform.

First, U.S. Business Does Not Operate in a Closed System. The current system places American companies at a competitive disadvantage, and TEI testified that Congress must act to create a tax environment that allows U.S. companies to compete around the world while retaining research, manufacturing, and jobs at home. America's foreign trading partners are not shy in vying for new plants, research facilities, and distribution centers, and--if the United States is to remain competitive--our rules must change.

Second, the U.S. Tax Rate Must Be Competitive. Historically, TEI has shied away from endorsing any particular tax rate, and at this stage, we have no plans to change our practice. We have not been reluctant, however, to point out our trading partners have made rate reductions the rule of the day, and the result has been that the United States has gone from having one of the lowest corporate rates in the mid-1980s to having one of the highest. Leveling the "rate playing field" will make the U.S. tax system more competitive. Moreover, we testified, lower rates do not necessarily mean lower revenue, both because of complementary changes to the tax base and the dynamic effect of rate reductions.

Third, the Tax System Should Not Pick "Winners" and "Losers." This may be the trickiest of the four principles for TEI to embrace, but there is a growing consensus that favors lower rates and a broader tax base over targeted incentives to reduce complexity, ease tax administration, and minimize the government's role in picking "winners" and "losers.

To be sure, there is truth in the saying "where you sit depends on where you stand"--and there may be public policy considerations dictating a different result (as has been the case in respect of education and research...