Tax Day: Exploring the Adverse Effects of High Taxes and a Complex Tax Code

Verbal Remarks of Aaron Hedlund Before the House Committee on Small Business - April 10, 2024.

Good morning, Chairman Williams, Vice Chairman Luetkemeyer, Ranking Member Velázquez, and Members of the Committee. It is truly a privilege to engage with you today on such a timely and important topic as the harmful effects of complex, high, and unfair taxes.

My name is Aaron Hedlund, and I have been an economics professor for more than a decade, and from 2020 to 2021, I had the privilege to serve as the Chief Domestic Economist and Senior Advisor at the White House Council of Economic Advisers. The views expressed today are my own.

The Current Economic Context

Before jumping in, I’d like to establish some economic context for our discussion. Put simply, America is in the midst of a policy-induced cost-of-living crisis.

One way to describe inflation is as too much money chasing two few goods, which means there are two basic ways to end the crisis. The first is to address the “too much money” part by withdrawing excess demand. The most natural way to do this would be to stop government overspending. But with the reckless fiscal policy of the past few years, the Federal Reserve has had to step in with its own painful medicine of interest rate hikes to tame demand.

The other avenue to reduce inflation is to address the problem of “too few goods” by putting in place pro-growth policies that expand supply and create affordable abundance. This recipe has succeeded in the past. The 1980s “supply-side revolution” of simple, low, and fair taxes coupled with regulatory reform and sound money put an end to stagflation.

The 2017 Tax Cuts and Jobs Act and the Blue-Collar Boom

The second major success of this approach occurred starting in 2017. Following years of failed attempts by its predecessor at stimulus-driven growth, the Trump Administration along with Congress took a different approach when they unleashed the beginnings of a second supply-side revolution with the Tax Cuts and Jobs Act—or TCJA—as one of its centerpieces.

TCJA had three primary goals:

1. Make the U.S. competitive on the world stage and repatriate earnings from abroad by reducing what was one of the highest corporate tax rates in the developed world.
2. Reverse the stagnation of living standards that families had been facing since 2007 and simplify taxes by lowering marginal rates and doubling the standard deduction.
3. Boost small businesses and unleash investment across the country by lowering tax rates, creating the 20% pass-through deduction, and enacting Opportunity Zones.

The results were a resounding success, as the economy vastly outperformed official forecasts made in 2016. Unemployment and poverty rates hit record lows, income gains reached record highs, and tens of billions of dollars flowed into the highest poverty communities. The typical American family saw their real income rise by $6,000, with the biggest gains occurring at the bottom. In short, TCJA unleashed a blue-collar boom. By contrast, families have lost $4,000 in real income over the past few years due to inflation.

The Path Forward

These accomplishments are notable, but Americans still crave further progress toward taxes that are simple, low, and fair.

Simple

Tax complexity costs Americans hundreds of billions of dollars in accounting and compliance headaches—resources that should be going to productive economic activities, not paperwork and bureaucracy. Tax simplification is deregulation. Make the tax code simpler, and people won’t have to contend with so many IRS regulations.

Low

One myth about tax cuts is that they deprive the government of needed funds. The truth is that the government does not have a revenue problem. It has a spending problem. Federal receipts as a share of GDP have been stable for decades, and in 2022 they reached their second highest level since World War II. Meanwhile, spending had averaged 20% of GDP for the fifty year period prior to COVID but is now forecasted to be 23 to 24% over the next decade, and rising from there.

Fair

Everybody wants a fair tax code, but class warfare mythology about the rich paying less in taxes than everyone else obscures the true sources of unfairness. The truth is that while the top 1% earn about 20% of total income in the economy, they pay over 40% of total income taxes—i.e. double—with that share actually increasing after TCJA.

So what actually makes taxes unfair? It is unfair that the complexity of the tax code advantages those with the resources to hire teams of lawyers, accountants, and lobbyists. And it is unfair that high effective tax rates disproportionately punish people aspiring to climb the economic ladder to enter the middle class or start a business.

True tax fairness pursues a level playing field, not level incomes; equality of opportunity, not equality of outcomes; and more private investment—especially in human capital—not less.

Conclusions

Extending TCJA should be the foundation upon which to build a tax code that is simple, low, and fair, but I encourage Congress to be bold and not stop there. Thank you for the opportunity to speak with you about this important matter, and I look forward to answering your questions.