Keeping an Eye on the Bigger Tax Reform Picture

More than 30 years ago, Republicans and Democrats in Washington set aside their differences and worked together to pass comprehensive tax reform. Unfortunately, in the ensuing years, our tax code has become more bloated and complex. We’ve now reached the point where, once again, both parties recognize the need for reform, prompting House Speaker Paul Ryan (R-Wis.) and House Ways and Means Committee Chairman Kevin Brady (R-Texas) to introduce their tax reform blueprint – “A Better Way.” As details continue to be hammered out — and President Donald Trump hopefully provides some insight tonight in his address to a joint session of Congress — let’s keep in mind that the ultimate goal is sector-neutral, comprehensive tax reform.

Simplifying the tax code. The tax code has more than 2 million words. Individuals and businesses spend billions of dollars and billions of hours trying to comply with the tax code. Any reform must start with simplifying the tax code.

Lowering the corporate tax rate. As the House blueprint bluntly states, “The corporate tax rate represents the most important tax-related factor in a company’s decision to invest and locate jobs in the United States or overseas.” With the United States imposing the world’s highest corporate tax – 39 percent federal and state combined – among OECD industrialized countries, it’s not surprising that companies are searching for more tax friendly jurisdictions. And while that high rate has remained steady for decades, the worldwide rate dropped to 22.5 percent from 30 percent.

The House would lower the corporate rate to 20 percent, resulting in companies staying, investing and creating jobs right here at home. The Tax Foundation concluded that such a corporate rate reduction raises the nation’s gross domestic product by around 3.4 percent over 10 years and noted, “the rise in GDP and capital formation gradually raise wages by 2.9 percent, and hours worked by 0.6 percent, about equivalent to 650,000 full time jobs.”

Ending the worldwide tax system employed by the United States. Currently, the United States utilizes what is called a “worldwide system” in order to tax international business income. Essentially, all business income, including income earned overseas, of domestically headquartered companies is taxed by the U.S. government. If they want to reinvest those earnings here, they are first handed a substantial tax bill. The result is that those worldwide companies hold almost $2 trillion in capital overseas.

The United States is the only G7 country that continues to operate under the outdated worldwide tax system. The majority of the world employs a “territorial system” that only collects taxes on income earned within a country’s border. Discarding the worldwide tax system in favor of territorial would allow American companies to operate on an equal footing in foreign markets and bring those trillions of dollars back home. Furthermore, it would dissuade companies from moving their headquarters overseas.

Full expensing for capital investments. The Ryan-Brady blueprint would allow the nation’s businesses to immediately deduct the full cost of any new investment immediately, rather than recovering the cost of that investment years later. This would be a major boost for businesses of all sizes across the nation, spurring economic growth and investment. Not only that, but as the Tax Foundation noted, “Expensing does more to raise GDP, wages, and employment than any other feature of the Blueprint. Better yet, it is one of the very few tax changes that boost GDP sufficiently to recover its initial revenue losses and raise revenue over time.”

These are just a few of the pro-growth proposals put forth in the Ryan-Brady blueprint. Significantly though, it’s not just businesses that will benefit but taxpayers as well. The blueprint consolidates the tax brackets down to just three with the top individual rate reduced to 33 percent and eliminates the estate tax. The goal is to simplify it so that taxpayers will be able to file their taxes on a form as simple as a postcard.

All in all, the blueprint represents the best roadmap to comprehensive tax reform. It’s taken a long time for us to reach this point, let’s not go off course at this critical moment.


David Williams is the president of the Taxpayers Protection Alliance.

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