10-29-2024
As the hotly contested 2024 election season draws to a close, one point of unity that brings people together is the conviction that the tax code is broken. People may disagree on how to fix the tax code, but they agree on the need to do something.
Back in April, I had the opportunity to return to Washington, D.C. — where I had previously served in the White House Council of Economic Advisers — to deliver invited Congressional testimony to the House Small Business Committee for a hearing titled “Tax Day: Exploring the Adverse Effects of High Taxes and a Complex Tax Code.” The theme of my written testimony and verbal remarks was straightforward: Economic prosperity is enhanced when taxes are simple, low, and fair. Evidence from the most recent major tax reform — the 2017 Tax Cuts and Jobs Act — bears this out.
One of the most significant pillars of that reform was the cut in the corporate tax rate from a globally uncompetitive 35% to a more growth-friendly 21%. In addition, the reform lowered tax rates across the board for individuals and small businesses, nearly doubled the standard deduction, allowed businesses to immediately deduct the full value of new investments, and instituted an innovative, market-driven incentive called Opportunity Zones to attract private capital to distressed communities across America.
These reforms undoubtedly lowered taxes. They also simplified taxes by, among other things, inducing far more people to simply claim the standard deduction instead of going through the cumbersome process of itemizing. People have differing views about the fairness of the reforms, though the data is clear that Americans of all backgrounds saw their economic fortunes improve following the law’s passage.
Prior to the arrival of COVID-19, the economy was producing the most rapid income gains ever recorded by the U.S. Census along with the lowest poverty rates. Moreover, the gains were larger for people with less formal education and for those from outside the managerial class than for those at the top. A recent National Bureau of Economic Research paper finds that the reforms generated an investment boom.
Nevertheless, Americans still pay enormous sums dealing with tax headaches, and too much economic potential remains unrealized because of inefficiencies and disincentives in the tax code. For my part, I am excited to contribute solutions and to refine my ideas based on the insights of my Purdue colleagues.
Aaron Hedlund is an Associate Professor of Economics at the Daniels School of Business and a faculty affiliate of both the Dean V. White Real Estate Finance Program and the Purdue University Research Center in Economics. He is also Research Fellow at the St. Louis Federal Reserve Bank and was the Chief Domestic Economist and Senior Adviser at the White House Council of Economic Advisers from 2020 to 2021.
