Do the following comments sound familiar?
“Our tax code is in dire need of reform.”
“A growing maze of tax rules and incentives target narrow classes of individuals; phase-outs, contribution limits, and complicated eligibility criteria circumscribe the scope of older programs.”
“Changes in the global economy, including increasingly sophisticated financial instruments, the free flow of capital across borders, a globally competitive marketplace, and the expanding role of intangible assets in producing business income, have also made it harder to establish the rules required to accurately measure tax liability and fairly enforce the income tax.”
You shouldn’t feel bad if you thought you heard them recently, as Washington, D.C. is abuzz with talk about tax reform. But they actually come from the 2005 report of the President’s Panel on Federal Tax Reform, a bipartisan group established by President Bush that I had the privilege of leading as executive director. The nine-member panel unanimously recommended a pair of tax reform plans, including a predecessor to the blueprint currently being offered by House leaders. (More about that plan in a minute.)
The truth is that the key reasons for tax reform in 2005 are even more compelling today. Tax rates are even higher and the volume of tax-based transactions has increased. Moreover, while American corporations continue to pay some of the world’s highest corporate tax rates, as they did in 2005, other competitor nations have taken steps to lower their own tax rates. Today, the tax rate on American businesses is nearly double the average tax rate of their foreign counterparts in developed nations: 39% versus 25%.
Just how heavy is the burden on American businesses? In addition to the rate itself, the National Taxpayers Union estimates that the unwieldy federal income tax costs the U.S. economy a staggering $233.8 billion annually in productivity. These costs don’t just hurt American businesses; they also hurt American workers by limiting growth opportunities.
Our nation’s inability to fix our broken tax code has led to a fickle recovery from economic recession, as GDP growth has crawled along at a low rate of less than two percent, and hourly earnings are trending barely more than flat. Participation in the labor force, meanwhile, remains stuck around a paltry 63%. These metrics are the direct reflection of a tax code that has been left largely unchanged since 1986 and that lacks a focus on global competitiveness.
U.S.-based corporations, burdened by our clumsy tax code, have sought new ways to take advantage of greener tax pastures overseas. And while changes to the tax code in the early 2000’s have tried to reduce the incentive of simply relocating a company headquarters to a nation with more tax advantages, corporations have continued to find inventive new ways to cope with a caustic federal tax system.
Understanding that such a tax environment is unsustainable, Speaker Paul Ryan and House Ways and Means Committee Chairman Kevin Brady have offered a new approach. Their blueprint, which is very similar to the Panel’s “Growth and Investment Tax Plan,” would unleash American productivity, and according to the Tax Foundation, boost GDP growth by more than 9 percent.
How does the plan get results? First, it lowers tax rates on corporations to 20%, thereby bringing the U.S. tax rate closer in line to competitor nations. Second, it taxes businesses on their cash flow, meaning an immediate write-off for new investment; no longer would businesses be discouraged from investing in new products and services. Third, it eliminates the net interest expense deduction, resulting in equal treatment across financing mechanisms; as such, there would be no distortion between equity and debt financing. Finally, the blueprint addresses the unequal tax treatment of goods and services that are imported to the U.S. versus those that our businesses export.
As the Panel recommended in its 2005 report, the Brady-Ryan plan adopts a system of border adjustments. While the products we send overseas are often burdened with high taxes, the goods we import are left largely untouched. The use of border adjustments helps to level the playing field for imports and exports and also removes one of the major incentives for tax avoidance. The border adjustments are expected to generate $1 trillion in revenue over a ten-year period, money that would be used to achieve tax rate reductions and fund other essential components of the plan.
Even as the House blueprint undergoes robust and necessary debate, we should all recognize that the time for comprehensive tax reform is long overdue. The tax code has become increasingly complex since 2005 when the Panel on Federal Tax Reform made our comprehensive recommendations (and even more outdated since the last full-scale reform in 1986). Congress, working hand in hand with President Trump, has a historic opportunity to enact sweeping tax reform that helps American businesses and families and creates a stronger national economy.
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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