The first round of tax reform hearings in Congress is in the books, with another hearing set for today in the Senate Small Business and Entrepreneurship Committee. As they move forward, it’s critical that lawmakers continue to keep in mind that any proposals must encourage entrepreneurship, long-term growth, investment and job creation across the entire economy.
Reducing tax rates and enacting common sense, comprehensive tax reform will have a profoundly positive impact on our nation’s small business community.
Near-universal consensus exists that the current federal tax code is antiquated, and needlessly burdensome and complex. According to a 2016 Tax Foundation report, the compliance cost to the U.S. economy each year from the federal income tax comes in at an eye-popping $409 billion in productivity, and more than 6.1 billion hours of total labor time. That’s exorbitant for America, especially its small businesses.
For good measure, and most troubling, U.S. tax rates are high and non-competitive.
As noted in recent analyses by the Small Business & Entrepreneurship Council, the U.S. corporate rate – that is, the combined federal and average state rate (in total, 40 percent) – actually ranks second highest on the planet (170th out of 171 nations ranked). In addition, the top personal income tax rate (the federal plus average state rate registers at least 42.6 percent) ranks 29th highest (115th out of 144 nations ranked).
To drive home the point of how non-competitive the U.S. corporate tax rate is, consider that the country’s 40 percent rate far outdistances the global average of 24.29 percent; the Americas average of 28.29 percent; the EU averages of 21.51 percent; the Asia average of 21.28 percent; and the OECD average of 24.27 percent. And on the individual side, the top 42.6 percent rate in the United States exceeds the average rates for the globe (33.73 percent), the Americas (34.29 percent), Asia (30.50 percent) and Europe (35.51 percent).
Such high tax rates suppress the entrepreneurial spirit, penalize success and discourage investment, and in turn, rein in economic and employment growth.
Wisely, the Trump administration and congressional leaders have made it their priority to modernize the antiquated tax code to consider the changing global economy by lowering tax rates and moving to a territorial system to prevent double taxation for income earned overseas.
The White House recently revealed an outline with a goal to achieve significant tax relief through extensive reform. This framework serves as a sound roadmap for discussions between Congress and the White House to develop a tax plan that will successfully allow American productivity and investment to flourish again. Such a plan, as Treasury Secretary Steven Mnuchin and National Economic Council Director Gary Cohn pointed out, will benefit America at large – spurring jobs, growth and prosperity.
All companies would benefit significantly from tax reductions. Small businesses will value the opportunity to keep more of their own money, and determine for themselves how to prioritize their expenditures.
Consider that if the corporate tax rate were reduced to 15 percent, as proposed by the Trump administration, the United States would then be tied (with 11 other nations) for 25th among 171 nations. That would be a breathtaking improvement in the nation’s competitive tax position, again, to the benefit of many small businesses, and the U.S. economy in general. It also must be noted that under the Trump plan, the proposed corporate tax rate of 15 percent would pertain to non-C-Corps as well, but obviously not to the owners’ salaries and wages.
When you think about how the Reagan supply-side revolution in the United States sparked a global movement toward lower tax rates more than 30 years ago, it’s distressing for the United States to now impose among the most burdensome tax rates on the planet. Much of the rest of the world has left us behind.
Tax reform needs to be bold, including across-the-board tax rate cuts for individuals and businesses. Congressional leaders and President Donald Trump cannot let another year go by without enacting meaningful tax relief and reform. Our small businesses, entrepreneurs, America’s workforce and whole economy are dependent upon the move to a more competitive and pro-growth tax system.
Raymond J. Keating is the chief economist with the Small Business & Entrepreneurship Council.
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