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Editorial

Tax reform is No. 1 priority

President Donald Trump should halt his efforts to badger Congress into repealing and replacing the Affordable Care Act. It is blocking equally important parts of his agenda — tax reform and infrastructure revitalization.

If he does not relent, he could finish his first year in office with no significant legislative accomplishments, and the country would be poorer than it should be.

Tax reform is absolutely necessary to keep the economy growing and preserve the bull market. It will provide faster stimulus than infrastructure spending. It could be accomplished in one session if the president and Congress put their minds to it and are willing to compromise.

Tax reform is more important than tax cuts. However, many Republicans and the president will push for cuts. Others will resist, citing the need to balance the federal budget and halt the growth of the national debt. Many Democrats likely will push for higher taxes on the rich and tax cuts for the middle class, with only minimal tax cuts for corporations. Those disagreements must not be allowed to kill the impetus to tax simplification.

One reason tax reform will be much more important in generating additional economic growth than tax cuts is because tax complexity is a large hidden tax on the economy that generates little revenue for the federal government. According to the National Taxpayers Union, the federal personal income tax system cost the economy $233.8 billion in productivity in 2014, the most recent figures available. This included $31.7 billion for software and other tax preparation assistance, and an estimated $202.1 billion due to the 6.1 billion hours spent filling out the forms.

The cost for businesses likely was much higher because corporate taxes are far more complex and involve the efforts of lawyers and accountants deciphering the millions of lines of the tax code as they apply to each company. Tax simplification will greatly reduce those costs and should free up resources for economic growth.

Tax reform will involve the elimination of deductions, so-called loopholes, at both the individual and corporate levels. To some, the tax deductibility of individual and corporate contributions to 401(k) and other defined contribution retirement plans is a loophole, draining money from the federal government coffers. But that is shoddy thinking; taxes owed on DC plan contributions are not eliminated, they are simply deferred until workers retire.

Without an incentive to save provided by the deferral of income taxes due on the contributions, the U.S. personal saving rate, already a low 5.5%, would likely be abysmal. Inadequate saving eventually leads to inadequate investment and ultimately slower economic growth in the U.S., which translates into lower revenue for the federal government. The low U.S. saving rate has been offset in recent years by the flow of savings from other countries. But that flow will diminish as the rate of growth accelerates in other countries — and judging by the weakness of the dollar in recent weeks, it likely already has.

President Trump should stop wasting time and energy on health-care reform and work with Congress to reform taxes while at least doing no harm to the nation's private retirement system. Then they can turn their attention to infrastructure.