The tax reform train is about to leave the station. But when it reaches its final destination — President Trump’s desk — what will it look like?
On July 27, the drumbeat for reform hit another positive note when the Trump Administration, Congressional leadership, and the chairs of the Senate and House tax writing committees (the so-called “Big Six”) joined forces to release a joint statement outlining their common position on comprehensive tax reform. This collaborative effort should go a long way toward building consensus and momentum as lawmakers enter the August recess.
The reasons we need a plan with real horsepower are well-known. They include a high corporate tax rate that compares poorly to our competitors, a clumsy and outdated worldwide system of taxation that hamstrings American businesses, and a complicated individual tax system that hurts small businesses and drives taxpayers crazy.
The solutions are just as well known. Lower the tax rates on corporations and small businesses, reduce individual rates, and simplify the code. Join every other advanced economy and move to a territorial tax system (so that foreign earnings are not taxed once overseas and then again when they are brought home). Give the economy a boost by accelerating the write-off of all capital investments.
These approaches to generating sustained economic growth have deep roots, including my work as Executive Director of President George W. Bush’s Panel on Federal Tax Reform. They are also close to the principles outlined in the Big Six’s preferred reform plan, which “reduces tax rates as much as possible, allows unprecedented capital expensing [for businesses], places a priority on permanence, and creates a system that encourages American companies to bring back jobs and profits trapped overseas.”
The Big Six are on the right track. They understand that only a comprehensive approach to tax reform will generate the real, long-term economic gains that the American economy needs. That’s why a number of groups are rallying around this more robust version of reform. The Small Business and Entrepreneurship Council (SBEC), for example, recently released a letter signed by 55 American companies spelling out the need to go beyond simply lowering tax rates, calling instead for a comprehensive, multi-pronged plan that includes switching to a territorial tax system and full expensing of capital investments.
Groups like SBEC and other pro-reform voices are focused on full, immediate expensing because it is projected to have twice the impact on economic growth as a cut to the corporate tax rate alone. Furthermore, according to the Tax Foundation, a full expensing provision would increase households’ after-tax incomes by an average of 5.3 percent. Compare that to a 4 percent gain from lowering the corporate tax rate and a 3.6 percent gain from consolidating individual tax brackets. The proposal is also estimated to save $23 billion annually by cutting down on the 448 million hours that American businesses spend each year complying with our current system.
As policymakers craft legislation, permanence should also be front and center. Temporary rate cuts and other short-term provisions simply do not have the same lasting impact. Permanent provisions are the best way to change behavior, something that is essential if reform is going to have the desired economic effect.
To be sure, putting a plan on the president’s desk will involve difficult choices and trade-offs. But at the same time, our leadership needs to recognize that the tax reform America needs shouldn’t be simply about temporarily reducing rates and claiming a victory. Real tax reform isn’t a political exercise but a transformation of the tax system that will last far beyond the next election cycle. The principles underlying the Bush Tax Reform Panel — “simple, fair, and pro-growth” — are as relevant today as they were twelve years ago, and they are achievable.
Jeffrey Kupfer is the former executive director of President George W. Bush’s Panel on Federal Tax Reform. He is currently an adjunct faculty member at Carnegie Mellon University’s Heinz College and an advisor to Beacon Global Strategies.
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