Inflation may be reaching its long-awaited peak, but the global economy is puttering along at a snail’s pace. Central banks around the world have aggressively tightened monetary policy to curb inflation, but these efforts have slowed economic growth.
For proof, just pick your headline. In Europe: “EU economy to ‘narrowly’ avoid a recession.” In the US: “Why the Long-Awaited US Recession Has Not Materialized—But Still Could.” In Africa, recession odds are climbing, and in the UK, a “sputtering” economy avoided a recession last quarter by the seat of its pants. Even China grew below the global average for the first time in 40 years.
In all, the UN projects this global slowdown to cost close to 20% of the world’s income. Even if recession forecasts improve, workers and businesses deserve better than this uncertain landscape.
The US has a chance to avoid recession and be the main source of global growth in 2023. But that requires a shift in tax priorities.
Lessons from the UK and Estonia
Before outlining potential solutions, it’s important to identify what lawmakers ought not do. Unfortunately, Great Britain has painted a masterpiece of policy gone wrong.
In November, Finance Minister Jeremy Hunt outlined £25 billion in tax hikes. His plans include raising taxes on middle-class workers and implementing a windfall tax on oil and gas firms. All this against a backdrop of a corporate income tax that is set to rise six points in two months.
When economic forecasts remain dim, giant employers scrap plans for expansion and instead set up shop in neighboring countries, and productivity two years after the pandemic’s peak continues to slow, the UK has a plan to rebound, right?
Smarter tax policy won’t solve Britain’s problems overnight. But a better tax code would put its economy on track for greater investment and productivity.
Estonia sets a better example. Prior to 2000, the country had a traditional corporate income tax system much like ours—complex, burdensome, and uncompetitive. But then it overhauled its corporate tax code, replacing it with a distributed profits system where profits are only taxed when they’re distributed to shareholders. Though some were skeptical this could raise sufficient revenue, the reform proved highly successful—it stimulated economic growth that more than made up for the initial drop in revenue.
Estonia now leads Europe in startups per capita, venture capital funding per capita, and capital investment per capita. Since 2000, Estonia’s GDP per capita has grown 119%. The US and the OECD: 27% and 26%, respectively.
Estonia regularly tops rankings of most competitive tax systems. American policymakers should follow its approach, not the UK’s, as outlined in Tax Foundation’s new Tax Reform Plan for Growth and Opportunity, if they want to help lead the world toward greater economic certainty.
Growth and Simplicity Through the Tax Code
Corporations and their capital are mobile; they will build new jobs where the tax code encourages growth and opportunity.
The first and most impactful step lawmakers can take to make the US that destination is a dramatic reform of the corporate tax system. We should replace our complex corporate income tax regime with a 20% distributed profits tax, ending double taxation of business income and encouraging investment.
Tax Foundation estimates that this, paired with smart individual tax reforms that reduce marginal tax rates, would boost long-run GDP by 2.3%, grow wages by 1.3%, and add 1.3 million full-time equivalent jobs, all while staying revenue neutral.
Balancing domestic policy is step one, but trade is pivotal to growth as well. Protectionist tariffs should be eliminated. Though they may protect jobs in certain industries, they come at a steep cost—to our consumers, our economy, and our international relationships. They tell our trading partners we’re not interested in their success and that we are willing to undermine our own.
Standing Out by Stepping Up
Pro-growth policies are even more important in an international context with policymakers who undervalue growth. Countries from the UK and the Netherlands to Chile and Colombia have pulled back on provisions that support business investment and instead increased corporate tax rates.
The 2021 global tax deal created a distraction for countries fighting a real crisis; For those at risk of recession or fiscal crisis, implementing a complex global minimum tax is the least of their concerns. In an anti-growth global tax climate, the US has a chance to stand out with tax policies that explicitly encourage growth.
With a Democratic president and a Republican speaker of the House, the path for bipartisan reform is narrow—one side is doubling down on misguided tax hikes, while some on the other side grasp to fill the void of workable solutions with unserious proposals. Washington would be smart to heed the UK’s warnings and find common ground. Because even if the tides are finally turning on inflation, it’s going to take bipartisan agreement to stop a recession in its tracks.
The US shouldn’t repeat other countries’ tax mistakes. For this to happen, growth must win out.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Daniel Bunn is president and CEO of the Tax Foundation, a think tank in Washington, D.C., and built its Center for Global Tax Policy.
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