Trump’s tax plan is the right approach to reinvigorating the economy
Last month, President Trump released a set of tax reform principles that serve as an excellent first blueprint toward enacting pro-growth reform. The plan to lower the tax rate for all businesses to 15 percent and enact a modern, territorial system of taxation would help to reinvigorate the economy and serve as a catalyst for reaching three percent economic growth, as the president has promised.
The plan will also lead to a simpler tax code and lower the tax burden for middle class families by doubling the standard deduction to $12,000 for an individual ($24,000 for a family), reducing the number of brackets to three, and consolidating or eliminating existing tax credits.
Each of these proposals are undeniably pro-growth, however the plan can be improved by converting the business tax to a consumption based “cash-flow” model that increase investment incentives and reduces distortions.
{mosads}In addition, tax reform must be permanent so that businesses have the certainty to make long-term decisions that allow the economy to grow.
Ensuring both of these concepts are in a tax reform package are crucial to meeting Trump’s three goals of tax reform – growing the economy, simplifying the tax code, and encouraging businesses competitiveness and innovation.
The Trump plan is already a great first step to achieving these goals.
The corporate rate of 39 percent (35 percent federal plus an average 4 percent state rate) is far higher than the average rate in the developed world, which is just 25 percent. Businesses organized as pass-through entities face even higher tax rates, reaching as much as 50 percent in some states.
These high rates mean businesses are unable to compete with foreign competitors that have aggressively reduced their rates. In contrast, the U.S. business rates remain barely unchanged three decades after President Reagan signed tax reform.
Lowering the corporate tax rate will again ensure American companies are able to compete with foreign competitors, and will ensure start-ups and small businesses are able to innovative and thrive.
While this low rate will help reinvigorate the economy, Trump should go bold on reform and move toward a consumption base that equitably taxes different types of investments and financing.
Currently, businesses must recover the cost of new investments in an arbitrary way where different types of investments are deducted, or “depreciated” over many years as dictated by more than one hundred pages of IRS rules.
Under the code, a computer is depreciated over five years, a desk over seven years, and a building as many as 39 years. This system distorts business decisions by forcing business owners to account for tax considerations when making choices.
The more appropriate tax policy would be moving to a cash-flow system so that 100 percent of business expenses can immediately be deducted. In addition, a cash-flow model would equalize the treatment of debt financing and equity financing.
In net, these changes would make the code simpler and fairer as businesses would no longer be treated differently based on different purchases.
Immediately allowing businesses to recover their costs also serves as a booster shot to increase economic growth, as a cash flow system increases investment in the economy leading to more jobs and higher wages.
According to research by the Tax Foundation, allowing businesses to immediately deduct investments by moving toward full business expensing will increase GDP growth and wages by 5 percent over the long-term creating one million new jobs.
In addition, tax reform must also be permanent, unlike the Bush tax cuts of 2001 and 2003. Business and family decisions are often made years in advance, so permanency is needed to provide certainty for taxpayers and investors.
In the current, politicized political environment, tax reform will almost certainly have to occur under budget reconciliation. For this to happen, lawmakers need a package that is dynamically scored as deficit-neutral. This means that tax cuts must be accompanied by base broadeners, like the border adjustment component proposed by House Republicans.
Failing to include base broadeners will mean tax reform has to be temporary, resulting in uncertainty for taxpayers that hinders investment and growth. Permanency means strong economic growth for years to come, rather than volatile growth for a limited number of years.
Trump’s tax plan already achieves many important objectives such as tax cuts and simplification for individuals, and lower rates and international competitiveness for businesses. Still, there is room for improvement. Adding immediate, full business expensing and ensuring these tax changes are permanent will make an already good plan even better.
Alex Hendrie is the director of tax policy at Americans for Tax Reform, a non-profit group that works to support limited government.
The views expressed by contributors are their own and are not the views of The Hill.
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