Tax reform to jump-start the economy
Three steps would break the Obama-era fetters
Memo to the congressional Republicans in whose hands tax reform currently rests: Do not let the perfect be the enemy of the good. President Trump’s tax reform plan promises to reenergize the American economy, create jobs and slow the increase of the national debt. You might say that the Trump tax plan will “fundamentally transform the United States of America” after “decades of broken politics in Washington” and “eight years of failed policies” under his predecessor’s administration — to use Barack Obama’s words from 2008.
Republicans in both Houses must work with Mr. Trump to implement tax reform in three key areas. First, reduce the corporate tax rate and eliminate the corporate catch-all alternative minimum tax, or AMT. Second, allow immediate expensing of capital investments. Third, implement a one-time tax for existing deferred foreign earnings of U.S. multinationals.
Together, these three steps would rev up our idling economy.
The United States imposes absurdly high and perverse tax rates on U.S. corporations relative to other nations competing for capital in our global economy, as a recent Congressional Budget Office study indicated. Of the G20 nations, the United States imposes a whopping 39.1 percent top statutory tax rate.
Japan and Germany, previously the top offenders, woke up and reduced their statutory corporate tax rate, ceding the top spot of ignominy to the United States in 2012, the most recent year for which data are available.
In the same study comparing average corporate tax rates, the 29 percent imposed by the United States is more onerous than every other G20 country other than Argentina and Indonesia, neither of whose economies we aspire to emulate.
Our high tax rate is largely to blame for U.S. companies voting with their feet by using tax inversion transactions to change their domicile so they can take advantage of lower tax rates in overseas jurisdictions.
The president’s tax proposal released before the election proposed a corporate tax rate of 15 percent and the elimination of corporate AMT. An alternative plan proposed last year by the House Ways and Means Committee contemplates a 20 percent rate as well as eliminating AMT.
The lower rate would more effectively jump-start our economy, create jobs and discourage inversions to tax-friendly jurisdictions such as Ireland, which boasts a roughly 12 percent corporate tax rate. That said, even a reduction to a 20 percent rate would move the economy toward growth. The president and lawmakers should not let the perfect be the enemy of the good.
Likewise, changing our tax code to allow the immediate expensing of capital investments would encourage more investment and production in the territorial United States. Currently, corporations are stockpiling cash in a risk-averse fashion, but this tax reform proposal would free up that cash to promote much-needed capital investments and incentivize companies to focus more production in the U.S.
The third element of the proposal — a one-time tax for existing deferred foreign earnings of U.S. multinationals — would fix a problem that hamstrings the U.S. economy. American companies hold an estimated $2 trillion or more overseas. The repatriation of these funds would free assets currently held overseas at favorable rates designed to encourage repatriation to the United States. The proposals differ slightly — 10 percent to 8 percent for cash payable over eight to ten years — but either proposal or a similar measure represents a major step in the right direction.
Mr. Trump promised to implement policy changes to make America open for business again. Correcting the wrongheaded policies of the past, and the last eight years in particular, requires a fundamental transformation of our current tax system. These proposals are far from that. They are only the initial steps toward a pro-growth transformation of our tax system, but adopting them will quickly bring significant economic benefits.
If congressional Republicans can seize the moment to adopt meaningful tax changes, they will lay the groundwork for further reform by ushering in a new period of long-overdue growth in the U.S. economy.