The 4 B’s of tax reform: Big, broad, bold and balanced

As momentum for tax reform continues to mount here in our nation’s capital, two congressional hearings on Thursday will help lay the groundwork for a consensus-driven approach on comprehensive tax reform.

On the House side, the Ways and Means Committee, led by its Chairman Kevin Brady (R-Texas), will focus on how tax reform can grow the American economy and create jobs. On the Senate side, the Banking Committee will hear from Treasury Secretary Steven Mnuchin.

{mosads}As these discussions take place, it is helpful to keep one central point in mind about tax reform: Cutting tax rates alone — while helpful and productive — is not sufficient to fix our outdated code. Policymakers should think bigger, broader and bolder. While they are at it, they should consider another “B” that Chairman Brady described in a recent Bloomberg interview — balance. 

Brady noted that by keeping an eye on balance — avoiding proposals that grow our already hefty deficit while pursuing permanent fixes — Congress has a real chance to create meaningful job growth and provide a much-needed course correction for the national economy.

Most agree that reforming our tax code should start with slashing tax rates. This means lowering one of the world’s highest corporate tax rates — one that ranks the U.S. 31st in competitiveness — and providing our small businesses with a significant tax break.

Both the plan offered by the White House and the one by House Speaker Paul Ryan (R-Wis.) and Chairman Brady would do that, cutting the corporate tax rate to just 15 percent and 20 percent, respectively, as well as lowering the rate on pass-through entities, which include most small businesses. Personal tax rates would also be reduced, allowing individuals and families to keep more of their earnings and infusing life into the economy.

But if our goal is to end up with a tax system that promotes economic growth over the long term, simply lowering the tax rate won’t get the job done. We need other changes to the tax system. The House plan, for instance, encourages growth by proposing to tax businesses on their cash flow. That means that all businesses would get an immediate write-off for any new investment.

The nonprofit Tax Foundation recently explained, “Full expensing is generally regarded as a better way to boost the size of the economy in the long run than simply cutting the corporate income tax rate. An intuitive way to understand how is that expensing is aimed entirely at new capital investment, whereas a corporate rate cut is not. Corporations only receive the benefit of expensing if they are investing in new plant and equipment. As such, corporations are encouraged to make investments at the margin.”

Moreover, we also need to modify the international tax regime. The current tax code encourages U.S. companies to relocate their headquarters and operations to save on their tax bills. Policymakers can fix this deficiency by instituting a territorial system, ensuring that American businesses are able to operate on a level playing field with their foreign competitors.

At the same time, the tax code should be built for growth, not to grow the deficit. Doing so could jeopardize the integrity of tax reform and could create more — rather than less — economic uncertainty. Serious tax reform should rest its foundation on fiscal responsibility with an eye toward long-term sustainability.

Sustainability is essential so that businesses have confidence in the reforms. Should lawmakers pass a plan that must be revisited in several years, as was the case with the sunsetting Bush-era tax cuts, businesses will lack the confidence they need to invest for the long term.

Our nation’s leaders have made it clear that fixing our broken tax system is a high priority. On Thursday, momentum toward that goal takes more steps forward as congressional committees sharpen their focus on comprehensive, pro-growth tax reform. As they do so, policymakers should recognize the value of tax reform that is not only big, broad and bold, but balanced as well.

By keeping fiscal responsibility top of mind, they can forge a solution that lasts. By cutting taxes for businesses of all sizes and making those cuts sustainable, they can give the economy the certainty it needs to create a new era of economic growth for all Americans.

Jeffrey Kupfer served as the executive director of President George W. Bush’s Panel on Federal Tax Reform, and is an adjunct professor of policy and management at Carnegie Mellon University’s Heinz College.

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