Today’s full House Ways and Means Committee hearing on tax reform should finally set the stage for comprehensive legislation to fix America’s broken tax code. Four months into the Trump administration — and more than 30 years since significant reform — it’s well past time to stop penalizing American taxpayers and American enterprise, and time to start instituting policies to unleash productivity, create jobs, and grow our nation’s economy.
Last month, the White House revealed its own set of tax reform principles and priorities. The White House tax plan and House tax reform proposal are largely complementary. But before they can be reconciled, and transformed into a consensus-driven legislative plan that will be signed into law, they must first be subject to an open debate, whereby all constituencies’ interests are represented. Hence Thursday’s full committee hearing.
The overriding goal must be to ensure that our tax code frees up Americans from an overly burdensome tax code and furthers American competitiveness in the global economy. Also, it shouldn’t impose discriminatory taxes nor apply costly regulations on productive sectors of the economy.
As evidenced by President Donald Trump’s issuance of Executive Order 13789, mandating “review [of] significant tax regulations issued in 2016” to determine if they “impose an undue financial burden on United States taxpayers, add undue complexity,” the Trump administration appears cognizant of these realities. Certainly, America’s business community responded with passion — with 15 business associations recently voicing their concerns — to urge a withdrawal of the Obama Treasury Department’s Section 385 regulations, issued last October.
Conceived as a remedy to address inversions, where American companies relocate their headquarters abroad in search of more favorable tax treatment, the Section 385 regulations sought, among other things, to reclassify debt as stock equity. In the process, the regulations will impose “excessive and unwarranted compliance and financial burdens…distorting investment and other business decisions, to the detriment of U.S. jobs,” the business associations wrote.
The Section 385 regulations represent a misplaced approach to fixing a hostile and unworkable tax code, and they don’t deter inversions. The key to retaining U.S. investment, jobs, and tax revenue here at home is a comprehensive, legislative approach that reduces onerous rates, treats all industries fairly, eases stifling regulatory burdens, and supports American competitiveness in the world market.
Just consider the compliance cost to the U.S. economy inherent in the federal income tax code. Recently quantified by the National Taxpayers Union at $232.8 billion annually, the tax code is crushing and indefensible. The $232 billion amount includes out-of-pocket expenses of $31.72 billion for software and tax-preparation assistance, as well as 6.1 billion hours of total labor time with an estimated $202.09 billion in labor.
So, too, is our worldwide tax system that penalizes American companies for generating earnings in overseas markets, subjecting them to double taxation, and leaving them vulnerable to situations like the one faced by Apple last year, in which the European Union levied a $14 billion fine for alleged back taxes (decried then by Chairman Kevin Brady as a “predatory tax grab”). Of the G7 countries, America is the sole outlier with our worldwide tax system; all others operate under a territorial system in which revenue is collected only on income earned within their own borders. Adopt it here, and America will repatriate trillions of dollars from overseas, and discourage inversions.
In coming months, Congress and the administration have many details to address. Whether they reduce the corporate rate to 15 percent (as the White House proposes), or go with the 20 percent advised by the House Republican plan, either would be well below the Organization for Economic Cooperation and Development average of 25 percent. Coupled with lowering the small business tax rate to 25 percent, it would be a prescription for reigniting American investment, consumption, competitiveness and growth. But nothing can be accomplished absent open and transparent debate with an ultimate aim for comprehensive, permanent reform.
David Williams is president of the Taxpayers Protection Alliance.
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