Status Quo Should Not Win When It Comes to Tax Reform

Despite the political drama coming out of Washington daily, all signs point toward comprehensive tax reform gaining real momentum.

President Donald Trump, who is scheduled to talk about tax reform today in Missouri, and House Speaker Paul Ryan have long inched complementary tax reform proposals closer to reality, but recent moves by Senate Finance Committee Chairman Orrin Hatch, House Ways and Means Chairman Kevin Brady, Senate Majority Leader Mitch McConnell and National Economic Council Director Gary Cohn who, along with Ryan, make up the so-called Big Six, have signaled they’re ready to get permanent tax reform done this year.

Chairman Brady also fanned the flames recently when he appeared at the Reagan Ranch in Southern California alongside other committee members to urge Congress to pass comprehensive tax reform legislation. Brady noted that “we cannot let the status quo win” when it comes to the U.S. tax code and that “when this fight gets tough, and it will over the coming months, we can’t give up.”

The sense of urgency by Chairman Brady and the continued commitment by the Big Six to comprehensive tax reform certainly bode well for the prospect of real taxpayer relief in the near future. It is no secret that President Trump and Republican lawmakers could use a victory now more than ever as they attempt to hold onto majorities in the House and Senate. Passing a comprehensive tax reform bill would not just be a shot in the arm for the political class, but an important win for American businesses and families looking for meaningful tax relief.

If done right, tax reform will deliver new private-sector jobs, bolster the kind of investment that leads to long-term economic growth and lift workers’ wages. According to calculations by the Tax Foundation, the plan currently proposed in the House would lead to a 9.1 percent increase in GDP over the long term, create 1.7 million full-time equivalent jobs and raise the after-tax incomes of all taxpayers by at least 8.4 percent. Economic growth hinges not on profligate federal spending, but on leaving more money in the hands of American families and businesses.

Congress and President Trump also have an important opportunity to strike a blow for American businesses by changing the way the United States taxes business income earned abroad. Currently, the worldwide tax system used here taxes all income earned by U.S.-based firms at U.S. corporate tax rates (nearly the highest on the planet) no matter where that money is earned. It is an outdated system that places U.S. companies at a competitive disadvantage relative to companies headquartered overseas.

The United States is the only member of the Group of Seven major industrial nations that operates under such a bizarre business tax code. It is as if a Utah household earned income in, say, Mississippi, but received no credit on its Utah tax return for taxes paid into Mississippi’s treasury.

As part of the tax reform effort underway, the president and lawmakers have a chance to transition to the territorial tax system adopted by most first-world economies. This crucial step would help eliminate the double taxation of U.S. firms and align the U.S. tax code more closely with the rest of the world.

Finally, the push toward tax reform offers an opportunity to establish sensible, pro-growth policy for America’s energy sector. As tax reform gains traction in Washington, attacks on the tax treatment of oil and gas companies have become less strident. Early efforts by Sens. Bernie Sanders (I-Vt.) and Al Franken (D-Minn.) to single out energy firms for prejudicial tax treatment — once aired in questions to then-Energy Secretary nominee Rick Perry during his confirmation hearings — by and large have been rejected. Energy companies, large and small alike, should be allowed to take the same tax deductions allowed to virtually all U.S. manufacturers.

It turns out that renewable energy companies — not traditional energy producers — are the biggest recipients of tax favors. The Congressional Budget Office estimates that, of an $18.4 billion total, “$10.9 billion, or 59 percent of the energy-related tax preferences, was directed toward renewable energy” in 2016. As tax reform progresses, it is important that all lawmakers recognize that a pro-growth business tax code is neutral, that is, neither biased against nor favorable to any taxpayer. The availability of abundant, inexpensive and secure energy depends on fair tax treatment of all power sources.

Momentum is mounting in Washington for comprehensive tax reform as the Big Six continue their diligent efforts to make tax reform a reality. There is not a moment to lose. If lawmakers want to set our nation on a long-term growth trajectory, reform that is comprehensive and permanent will pass, thereby restoring the confidence that American companies need to start investing again.

As Chairman Brady has stated, the status quo cannot be allowed to win.

William F. Shughart II, research director of the Independent Institute, is J. Fish Smith Professor in Public Choice at the Huntsman School of Business at Utah State University.

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