Today, the Treasury Department and the Internal Revenue Service (IRS) will hold a public hearing where multiple stakeholders will give their input on Treasury’s recently proposed rules and their potential impact. For those unfamiliar, Treasury announced early this spring that, in an effort to combat corporate inversions, it would propose that under Section 385 of the Internal Revenue Code, related intercompany debt could re-defined as equity, changing the tax consequences of the transaction.
Business groups along with members of Congress from both sides of the aisle have warned Treasury about the broad reach of the rules, which will sweep up even companies with no intention to move abroad. The groups and Congress also warned about the consequences of increased business costs and that the new rules would be an obstacle to job and economic growth.
While the public comment period has already closed, it’s not too late for the Administration to reconsider such drastic action especially when another alternative is available. That alternative is comprehensive tax reform. Specifically, the recently released GOP tax reform blueprint.
The plan, titled “A Better Way for Tax Reform,” was unveiled by House Speaker Paul Ryan (R-Wis.) and House Ways and Means Committee Chairman Kevin Brady (R-Texas) at the end of June. During the announcement, Chairman Brady described the blueprint as “a new tax code for the American people – a tax code built for growth: for the growth of paychecks, for the growth of local jobs and economy, and the growth of America’s economy.”
Revolutionary in many ways, the plan envisions making our tax code so simple that Americans can file their taxes on a postcard. Currently, billions of dollars and hours are spent trying to comply with a complex code that runs over 74,000 words. And indeed, it consolidates the system down to three tax brackets, lowering the individual income rate to 33 percent. It also simplifies filing for families with a larger standard deduction and larger child and dependent tax credit.
All are monumental steps towards the goal of a simpler tax code.
On the business side, the blueprint would lower the corporate tax rate from the current combined 39 percent rate, down to 20 percent. It’s a move that is more in line with other developed countries and will go a long way towards growing jobs, encouraging investment and increasing growth. All three are critical to strengthening our economy.
It’s worth noting that amidst all the Brexit hoopla, comes news that the United Kingdom plans to once again lower its corporate tax rate to 18 percent, down from the current 20 percent rate. As George Osbourne, UK’s Chancellor of the Exchequer, noted, “We are giving businesses the lower taxes they can count on to grow with confidence, invest with confidence, create jobs with confidence.”
Small businesses across the nation, most of which file as individuals, would also see tax relief under Chairman Brady’s plan. Business income reported on individuals’ returns would be placed at 25 percent. This is critical as typically a small business files as an individual. Furthermore, the distinction between wage and business income allows for the lowest tax rate on pass-through income since before World War II.
This is the way to go about tax reform, unlike the Treasury Department’s failed piecemeal efforts, the latest of which gives new meaning to the word “overreach.”
Punishing businesses that are only attempting to survive under a tax system that is complex and burdensome, is a step backwards, not forwards. Treasury and Congress must work together towards a tax code that encourages – not discourages – businesses to thrive, resulting in increased revenue for our economy and additional jobs for Americans. The GOP tax reform blueprint is a good place to start.
David Williams is president of the Taxpayers Protection Alliance.