President Trump has said he wants to “cut the hell out of taxes” and for good reason. U.S. tax rates are among the highest in the world. The Gallup Poll has consistently shown that most Americans believe that federal taxes are too high.
But comprehensive tax reform involves more than simply cutting rates. The overhaul contemplated by the Republicans in charge would both lower rates and eliminate tax benefits. That means lawmakers need a better gauge than rates alone to determine who wins and who loses in whatever legislation they advance.
{mosads}To be specific, lawmakers should view reform through the lens of effective tax rates, the amount that businesses actually pay in taxes expressed as a percentage of their income. Only by looking at this bottom line — the effective tax rate — can decision makers understand how low taxes really go in the legislation they will soon debate.
Americans think that the tax system is broken and needs to be repaired. High effective tax rates have slowed job creation and economic growth and have harmed the competitiveness of American businesses. As a result, congressional leaders and President Trump, who began his campaign for tax reform recently with a trip to Missouri, have made revising the code a high priority this year.
Republicans in Congress and the Trump administration have signaled that effective rather than nominal rates will be a central part of the debate from their perspective. On April 26, Treasury Secretary Steven Mnuchin said during a press conference at the White House that “the effective tax rate is what we’re focused on.”
With that statement, he made clear that the White House is committed to lowering taxes, simplifying the tax code and creating a more level playing field for businesses of all sizes, across all industry sectors. Many businesses — large and small, corporations and family-owned enterprises — applaud him.
Businesses should not be subject to vastly different effective tax rates if they earn roughly the same amount of money. That’s not the case now. According to the Treasury Department, effective federal corporate tax rates between 2007 and 2010 ranged from 14.5 percent to 30.3 percent, which is a huge spread.
This gap is not only unfair to high-effective-rate-paying companies, but it also hurts the economy by distorting the allocation of investment among industries and artificially subsidizing certain industries while penalizing others. Propping up businesses through preferential treatment in the tax code is bad policy — and bad economics — for everyone.
If Congress doesn’t change this situation, the U.S. tax system will become increasingly unfair and uncompetitive. Indeed, tax reform should not just reduce the overall effective tax rate for businesses, it would narrow discrepancies between industries in the amounts they actually pay in taxes.
Congressional leaders such as House Ways and Means Committee Chairman Kevin Brady (R-Texas) recognize that the status quo is no longer an option if the U.S. is to remain competitive around the world. Likewise, the House GOP Task Force on Tax Reform has expressed its interest in reducing the disparities in effective tax rates paid by different U.S. industries.
The tax code, these lawmakers agree, should not disproportionately favor one set of companies over others. Only by making the playing field more level and reforming the nation’s broken tax system can lawmakers ensure that American businesses have the best opportunity to thrive. President Trump might even have the chance to achieve beyond the 3 percent annual growth in gross domestic product he promised.
Mark Allen, CEO of the International Foodservice Distributors Association, chairs the Coalition for Fair Effective Tax Rates, a diverse group of national and state associations representing more than 1,500,000 businesses.
The views expressed by contributors are their own and are not the views of The Hill.