A Call to Action In Pursuit of Substantial Tax Reform
“Once-in-a-generation moment.”
“We have to get this done in 2017.”
In a major speech last month, House Speaker Paul Ryan didn’t mince words when it came to the urgent need to revamp our federal tax code, outlining what he deemed “transformational tax reform.” Congress and the White House should heed this call to action, as not doing so would be a major blow to families, businesses of all sizes, and our economy.
Over the last thirty-plus years, the tax code has become mired in complexity, loopholes, and inefficiency. Washington has stood idly by while the rest of the world modernized their tax systems to keep pace with an ever-changing global marketplace. Lawmakers must reject our status quo tax code, lest we fall further behind.
While not delving into specific policy details – much of that already has already been revealed in the House leadership’s “A Better Way” blueprint – Speaker Ryan did argue broadly for removing the obstacles our outdated tax code poses to America’s businesses, including the high corporate tax rate and worldwide tax system. It’s an economically harmful combination with effects that reverberate in the nation’s bottom line and job market.
Which is why, as Speaker Ryan noted, “We cannot accept a system that perpetuates the drain of American businesses overseas.”
Washington can and must coalesce around reforms that let taxpayers keep more money in their pockets, simplify the tax filing, and make the United States the best place to do business. That begins with lower rates and a territorial system, both touched upon in Speaker Ryan’s address, along with full expensing for businesses. NTU recently led out-front by organizing a broad-based coalition to urge swift passage of comprehensive tax reform that should include those three bedrock, free-market principles.
The United States has the highest corporate tax rate in the industrialized world at a combined federal, state, and local rate of roughly 39 percent. That is far above the worldwide average rate of around 22 percent. Even if the rate was only reduced down to 25 percent, the U.S. would see immense economic benefits – a 2.3 percent increase in Gross Domestic Product (GDP) and 425,000 new jobs according to economic models. Speaker Ryan noted our northern neighbor has a corporate tax rate of 15 percent, a rate President Trump has proposed for the federal level. Such a drastic reduction would bring even more benefits – a GDP increase of 4.3 percent and 786,000 jobs.
Not only does the U.S. stand alone at the top with its crippling corporate tax rate, but it employs an antiquated tax scheme that harms domestic companies doing business overseas. Our worldwide system taxes all business income, including that earned abroad. Should those companies wish to bring that income back to the U.S., they find themselves facing double taxation as the income has already been taxed in the country in which it was earned.
This “worldwide” tax system has paralyzed multinational corporations into holding an estimated $2.6 trillion in offshore accounts to avoid paying additional taxes. All told, in the last 15 years, the number of OECD nations that have moved from a worldwide system to a territorial system (under which they only collect on income earned within their borders) has doubled. The U.S. is also the only G 7 nation to have a worldwide tax system. In order to remain globally competitive, we must catch up to the rest of the world.
Finally, while Speaker Ryan did not mention full expensing for capital investments (the House blueprint does call for such a proposal), it is another critical component for any tax reform plan. The current depreciation system must be modernized for businesses to fully and fairly deduct investment materials within the purchasing year. According to the Tax Foundation, doing so would lead to 5.4 percent higher long-term GDP, create more than 1 million full time jobs, and increase after-tax income by 5.3 percent.
The next few months will be critical for building on Speaker Ryan’s call to action. That’s because his Congressional colleague, Senate Finance Committee Chairman Orrin Hatch, has recently collected specific recommendations on the upper chamber’s blueprint for overhauling the Tax Code, a sure sign that the Senate will be at work as earnestly as the House. Given all this welcome news, Washington needs to seize upon the renewed sense of urgency and finally pass permanent, comprehensive tax reform before the end of this year. It’s time for the U.S. to get back in the global game.
