By contrast, most of the corporate tax cuts of the 2017 TCJA are permanent. If no action is taken, federal taxes will increase in most households. That means there is a strong incentive to do something bold. We could restructure the tax code to promote strong economic growth and dramatically reduce the federal deficit. With that in mind, a few basic principles should guide the next Congress in fundamentally reforming the tax code.

First up, the fact that people respond to incentives. Vice President Kamala Harris just acknowledged that truth by proposing an increase in support for business creation. Associated reform should focus on incentives for capital formation, innovation, and just plain hard work. Marginal tax rates should be as low as possible. Optimal tax policy should broaden the tax base and lower marginal tax rates. Society wants more of what our best and brightest produce. We want more of what Taylor Swift does. We especially want more from the geniuses who create businesses such as Amazon, Apple, and Nvidia.  When the most creative get to keep all of what they earn, society is better off.

Today, however, the U.S. imports capital. A reformed tax code should remedy that structural weakness. The tax code should encourage savings, which drive economic growth. The most efficient tax rate on capital gains is zero. If a zero rate is not politically feasible, then the rate of capital gains should be as low as possible. In that regard, Harris’s proposal to tax unrealized capital gains is a bad policy.

Given that marginal tax rates should be low and capital gains taxes and corporation taxes should be very low, what should the new Congress do to raise revenues?

To start, along with lowering tax rates, Congress should eliminate all tax expenditures, which are special tax incentives for certain sectors of the economy or for certain groups. The deduction for mortgage interest should be eliminated. The exclusion from income of employer-provided health insurance should be eliminated. The charitable deduction should be eliminated. Eliminating all special tax benefits would increase government revenues by almost $2 trillion annually.

That would go a long way to balancing the budget. But it is important to acknowledge that the U.S. saves too little and consumes too much. Witness the trade deficit. A 5% federal sales tax on all purchases of goods and services would raise over $300 billion a year, or more than 1% of gross domestic product. A small consumption tax would ensure that every American contributes to the well-being of the economy.

Lower tax rates. Dramatically expand the tax base and dramatically lower taxes on capital. Reduce taxes on business. Encourage savings and discourage conspicuous consumption.

These are the essential elements of a tax regime that would increase economic dynamism and ensure a prosperous future for all Americans. 

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James Rogan is a former U.S. foreign service officer who later worked in finance and law for 30 years. He writes a daily note on the markets, politics, and society.