Three Benefits of Comprehensive Tax Reform
Cutting the corporate tax rate to 20%
American businesses operate under the highest corporate taxes in the industrialized world, paying 39% of their income in tax while their competitors pay an average of just 22.5%. In addition, the federal tax code – which hasn’t been significantly reformed since 1986 – is notoriously complicated and tedious, costing companies resources that they could use for investments such as employees and equipment. The result of this outdated tax code is an uneven playing field that disadvantages U.S.-based companies and holds back our nation’s economic potential.
There are a number of approaches to comprehensively improve the U.S. tax code. One with a great deal of potential and momentum is the blueprint offered by House Speaker Paul Ryan and House Ways and Means Chairman Kevin Brady, called “A Better Way.” This plan has, as its foundation, a meaningful reduction in the federal corporate tax rate to 20%. By making the U.S. tax code competitive with other nations, this approach offers an effective way to stop the tax attack on American businesses and kickstart our economy. According to the Tax Foundation, the plan would amount to a $2.4 trillion tax cut over its first decade.
Provide full expensing for capital investment
Today, businesses are not allowed to deduct the full cost of capital investments in their businesses. When a bakery buys a new oven or an information company purchases new servers, these capital investments are only partially deductible over time though a clumsy and complicated process of depreciation. A better approach is to allow businesses to permanently and fully expense the cost of capital investments from their income. This treatment of capital investment ensures an equal playing field for all businesses and makes it more difficult for Congress to pick winners and losers through design of the tax code.
Not only does this approach ensure the same opportunities for all businesses, but it also has the potential to generate more tax revenue by making government a partner in capital investment rather than a barrier. Since almost all businesses invest in new equipment and buildings, full expensing of these capital investments would make the federal government a “co-investor with the American people as a whole, sharing both the gains and the losses from American entrepreneurship.” The National Center for Policy Analysis estimates that full expensing would create nearly a million new jobs and raise GDP by more than 5 percent.
Move to a territorial tax system
Comprehensive tax reform has to start with changing the way the U.S. taxes companies with international operations. Today, our worldwide system of taxation subjects American companies to double taxation, creating a strong disincentive to invest abroad. By taxing all of the business income of U.S.-based companies, including income earned in foreign nations, this worldwide tax system employed by our tax code destroys job opportunities and suppresses wages for U.S. workers. At its worst, this double taxation actually encourages American firms to locate their operations overseas in what is called an “inversion.”
Most other nations in the world have abandoned this outdated way of treating international business by moving to a “territorial model” that only taxes income earned within a nation’s borders. The U.S. remains one of a handful of industrialized nations that has yet to adopt this smarter way of treating foreign earnings. The consequence is a reduction of foreign investment and an obstacle to the free flow of capital that could create new jobs and new economic opportunities. Moving to a territorial tax system would help put U.S. companies on an equal footing when it comes to fast-growing foreign markets, potentially bring back trillions of dollars from overseas, and remove the incentive to locate abroad instead of right here at home.