News out of Capitol Hill recently serves as an indication that some type of tax reform could well be moving forward this year. While that prospect is a step in the right direction, Congress can, and should, do more to prioritize comprehensive tax reform to ensure the nation’s economy continues on an upward trajectory.
House Ways and Means Committee Chairman Kevin BradyKevin BradyOvernight Finance: Dems explore lawsuit against Trump | Full-court press for Trump tax plan | Clock ticks down to spending deadline Trump officials stage full-court press for tax plan Senate's No. 2 Republican: Border tax 'probably dead' MORE (R-Texas) has announced that he intends to hold a vote in 2016 on international tax reform. Brady told the audience at a Politicoevent it is “urgent that we move forward” on the issue, noting that success “allows us to focus in 2017 on the rates and the design” of comprehensive tax reform. And in a Bloomberg interview, he stated that he has already spoken about it with Senate Finance Committee Chairman Orrin HatchOrrin HatchWhen political opportunity knocked, Jason Chaffetz never failed to cash in Ginsburg pines for more collegial court confirmations Senate's No. 2 Republican: Border tax 'probably dead' MORE (R-Utah), a key player in the tax reform debate.
And making good on his word, Brady has already held his first committee hearing of the year which focused on “reaching America's potential through pro-growth policies.” It’s clear the time is ripe for both parties to come together and pledge to get serious tax reform accomplished this year.
All of this movement is good news for the nation’s economy. Our outdated tax code is in desperate need of reform, both domestically and internationally, in order to allow American businesses to compete globally and invest here at home. The U.S. tax rate on corporate income is tied with France as the highest among all OECD member countries; the personal income tax code is Byzantine and shot through with special favors for key political constituencies.
But amidst the flurry of legislation, hearings and press conferences, we must keep one thing in mind: tax reform should be pro-growth, pro-investment and treat all industries uniformly. A tax code that is friendly to some businesses is not the same thing as a “market-friendly” one. It is too easy to go down the wrong path and start choosing winners and losers in the tax reform game.
Case in point: attempts by the Obama administration and Capitol Hill Democrats to repeal tax deductions on leading sectors that contribute greatly to the nation’s economy. Last fall, Senate Democrats released an energy plan that would eliminate deductions on outlays for drilling and other essential investment projects under the false premise that the oil and gas sector receives subsidies. This premise could not be further from the truth.
A subsidy is a direct payment by the government with the intention of boosting an industry’s prospects. A deduction takes place when companies write off legitimate expenses against gross income before calculating their tax liabilities. The traditional energy industry does not receive subsidies. They do, however, along with virtually every company in the Dow Jones Industrial Average, qualify for and take these deductions.
Contrast this with Obama’s clear political favoritism towards the renewables sector, which has, in fact, been propped up by massive subsidies.
Under the Obama administration’s watch, subsidies towards the renewable energy sector have risen to record levels. A Congressional Research Service report last year found when all federal tax provisions for the energy sector are taken into account, $13.4 billion (57.4 percent) went to renewables in 2013. That same year, fossil fuels were responsible for 78.5 percent of U.S. primary energy production, with renewables accounting for just 11.4 percent. Additionally, the oil and gas sector paid an effective tax rate of 39.5 percent in contrast to an average 28.7 percent for all S&P 500 industrial companies in 2014.
Tax policy should not be used as a vehicle to favor – or punish – one industry over others. Comprehensive tax reform would do away with such favoritism and allow the government to place all sectors of the economy on a proverbial level playing field. Hopefully, our leaders will take the right tax reform path. Because in the end, the only winners in this game should be the American people and a strong, vibrant economy.
Shughart, research director of The Independent Institute, is J. Fish Smith Professor in Public Choice at Utah State University’s Huntsman School of Business and a senior fellow of Strata, a policy research center in Logan, Utah.