President Donald Trump and congressional leaders have a once-in-a-generation opportunity to rewrite the tax code to make it fairer, flatter and simpler, to grow our economy and create opportunities for all. To deliver, policy makers must be bold.
This is why lawmakers, when they overhaul the tax code, need to go with policies that have been proven to work and resist the urge to go with what’s untested and won’t deliver the type of economic growth that the American people deserve.
From experience and well-supported research, we know that the most pro-growth strategy is cutting corporate tax rates. Full and immediate expensing (FAIE) of capital investment, on the other hand, could get in the way of lowering the corporate rates far enough to regain competitiveness in the global economy.
To see the power of reducing the corporate tax rate, we can look to our own history. In the 10-year periods following the tax cuts made by President John F. Kennedy and President Ronald Reagan, federal tax receipts increased by hundreds of billions of dollars. Even more impressive, for the five years following these cuts, annual GDP growth grew significantly: 3.4 percent after the Reagan tax cuts, and 5.3 percent after the Kennedy tax cuts.
We also know that the economy added millions of jobs when Kennedy and Reagan cut the corporate rate as part of their reform packages.
Compare this record of success to the less-tested proposal for full and immediate expensing of capital investments, which allows companies to write off the cost of new investments in the year they are made rather than spreading the tax break over several years. With this year’s tax reform package confined by the fiscal restrictions of the budget reconciliation process, including FAIE would mean that the corporate rate would remain too high to be truly competitive in the global economy.
Additionally, there are a number of concerns when it comes to the efficacy of FAIE. The simple fact is that FAIE is untested and unproven. We can look to recent examples when it’s been tried (albeit at a smaller scale) but has come up short of delivering the economic growth promised.
Back in 2002-2003, Congress increased the cap on immediate expensing from $25,000 to $100,000 for small businesses. Research has found that there was no impact on the investment decisions of these firms. In fact, a smaller percentage of small businesses even took the deduction in the year with the more generous amount available. This is especially concerning because small businesses, with their more limited access to capital markets, would be the most inclined to take advantage of this tax provision.
And then there is the analysis conducted by the Joint Committee on Taxation that looked at a proposal, basically a smaller version of FAIE, that would make an existing 50 percent bonus depreciation permanent. The findings were underwhelming. According to the committee, permanent bonus depreciation would boost GDP by just 0.2 percent from 2016-2025.
That’s not enough economic growth, even considering the more limited nature of bonus depreciation compared to FAIE.
We need to lower tax rates to beat the global average of roughly 23 percent. This approach is time-tested and would generate more economic growth than FAIE. While countries around the world are racing to lower their business taxes, America has the highest corporate tax rate in the industrialized world — and it’s undermining our competitiveness in the global economy.
Because this year’s tax reform efforts will likely be driven by budgetary and parliamentary constraints, trade-offs are necessary. If the president and Congress are looking for the biggest economic bang for the buck from this once-in-a-generation opportunity to enact tax reform, we need to go with what’s been proven to work: lower tax rates.
Nathan Nascimento is the vice president of policy for Freedom Partners Chamber of Commerce.
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