For too long, American families and businesses have been held hostage by a tax code that has limited any real potential for economic growth and innovation. With some of the highest tax rates in the world, our code is in immediate need of reform – but “reform” should not mean deviating from the status quo to adopt growth-killing provisions.
Rep. Kevin Brady (R-Texas), chairman of the House Ways and Means Committee and member on the “Big Six” tax writing panel, said there “may be a need” to borrow some ideas from former Rep. Dave Camp’s (R-Mich.) 2014 tax reform plan. But Camp’s proposal contained many disastrous ideas that Congress needs to strike from consideration as soon as possible.
One of the greatest malefactors of Camp’s plan was the advertising tax. Currently, advertising is treated as a normal business expense, with a 100 percent deduction the year the money was spent. Adopting the Camp proposal would change that to only a 50 percent deduction in the first year, with the remaining 50 percent amortized over the next 10 years.
This tax, an assault on free speech, should be opposed on constitutional grounds alone, but it is especially immoral for economic reasons. To start or grow a successful business, an effective advertising campaign is essential. Business owners must pay for the publicity before they can sell their product, and thus, before any revenue even comes through the door. That is why advertising spending has been a fully deductible business expense ever since the tax code was created back in 1913 – doing anything else would be a giveaway to big businesses, hurting startups and smaller-scale companies.
To this day, the deduction helps businesses develop brand recognition so they can continue to grow, which in turn creates more jobs and ultimately more tax revenue as the company’s profit margins increase. In other words, less advertising would be very detrimental to the America’s bottom line.
A study by IHS Global found that in just 2014 alone, almost $300 billion in advertising spending was poured into the American economy. Those advertising dollars generated over $5.8 trillion in sales and helped to create 20 million jobs. That works out to be one heck of a rate of return, producing $19 of economic activity for every $1 spent.
For this reason, a bipartisan coalition of 124 House members signed a letter to leadership stating, “The potential for strengthening our economy through tax reform would be jeopardized by any proposal that imposes an advertising tax on our nation’s manufacturing, retail and service industries.”
Another misguided idea coming out of the Dave Camp tax provisions is to start taxing workers’ 401(k) contributions up front, rather than many years down the line when the money is used. Taxing 401(k) contributions may look like a good way to raise extra tax revenue, but in reality, it will do nothing more than discourage workers from saving their money for retirement.
This country already has a pitiful rate of savings per person. For instance, 44 percent of the country doesn’t even have the cash on hand to cover an emergency $400 expense. Instead of putting the working class further into the red by remaining fixated to the flawed Keynesian “spend-spend-spend!” ideas of the past, Congress should do everything it can to encourage individual self-reliance.
There has also been a great deal of talk about increasing the tax on carried interest, as Camp proposed. U.S. Treasury Secretary Steven Mnuchin has publicly stated, “We will close the loophole” related to this provision, while at the same time insinuating the administration may keep it for some.
This tax change might sound like a good idea since everyone loves the idea of sticking it to the “greedy hedge fund guys.” However, altering the treatment of carried interest would be imprudent and ultimately hurt the small startup businesses that are looking for investors to help them get off the ground.
Investors may have to wait years to ever realize a profit and, in some cases, lose their investment entirely. Considering the risk involved when supporting new business ventures, why would anyone take that chance if there wasn’t at least the possibility of a tax benefit? If anything, Congress should lower the income tax rate to the capital gains rate – not the other way around.
Without a doubt, implementing true, meaningful tax reform that works for all American taxpayers is a Herculean task. But most of the provisions that came out of Dave Camp’s tax plan are not the solution. Republicans need to remember that they were sent to Washington, D.C., to do what is fair and just, not what is quick and easy. The people that elected them are counting on them, once and for all, to get this right.
Dan Perrin is the president of the HSA Coalition. He is a former U.S. Committee on Foreign Relations staff member, where he served for more than seven years, and a former staffer with the U.S. Senate Steering Committee.
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