Why We Need Tax Reform Now

We need tax reform now. I am not talking about little tweaks here and there to the tax code. I mean fundamental, wide-sweeping tax reform that changes the system the way the Tax Reform Act of 1986 did during the Reagan administration. Why do we need fundamental tax reform? What effect would fundamental tax reform have on the economy?

The economy is in shambles. Part of the reason behind the economic situation is the uncertainty about future rules, regulations, and taxes. That last one is the key. Right now we have temporary tax measures in place that may or may not be extended (the Bush tax cuts expire at the end of 2012). Companies now look at tax code compliance as a profit machine. Because of the way the tax code is written today companies that can afford it can put tons of money into their tax compliant departments and end up paying zero taxes, or even better yet...get money back.

In order to jump start business and the economy, we need fundamental tax reform now. The good news is that fundamental tax reform was brought into the forefront of the Republican Presidential race by Herman Cain with his 9-9-9 plan and Rick Perry with his 20% flat tax plan. Both of these plans have their own merits. Either one would jump start our economy!

Even though Herman Cain's race to win the Republican nomination for President is over, he is keeping his 9-9-9 plan alive. The 9-9-9 plan reduces rates as low as possible while broadening the tax base substantially. Cain's plan completely abolishes the current tax code and starts over from scratch. This is the most attractive part of his plan. Starting over from scratch is what we need to be sure there are zero loopholes and credits built into the tax code from the get go. Cain's 9-9-9 plan hits the nail on the head from that standpoint.

Rick Perry's 20% flat tax plan also does a good job of reducing rates. Perry does not lower them as much as Cain does because Perry's plan does not include a national sales tax. Expect there to be much debate in the following weeks about which plan is better for our economy going forward. The great thing is, there will be debate about fundamental tax reform! Bringing this issue to the national spotlight during the 2012 election campaign could mean it stands a chance of actually happening!

There are problems though. Bruce Bartlett points them out in his blog in the NY Times. One of the biggest problems that Bartlett points out is the Norquist tax pledge that the majority of republicans have signed that states they will not raise taxes. The problem behind the pledge is that any tax plan that raises revenue can be viewed as a tax increase and a violation of the Norquist pledge.

The biggest problem though is that republicans and democrats just do not want to work together. A lot of this maybe due to the generational makeup of the political leaders in office today. For more information on generational theory I suggest reading, The Fourth Turning, by William Strauss and Neil Howe.

The bottom-line is that we need fundamental tax reform in the United States now. After the embarrassing payroll tax fiasco, Republicans have to regroup into something positive if they want to make way this campaign season. They are already hinting that fundamental tax reform is the way they will pivot, which is a positive sign. Either Herman Cain's 9-9-9 plan or Rick Perry's 20% flat tax plan would jump start the economy and give businesses the economic certainty they need to invest in the future. Whatever approach is taken, the key is that it has to be a fundamental transformation to the tax code. Not little tweaks here and there. After that happens, America would enjoy another boom time for years to come!