Economy & Budget

Tax reform is getting on the ‘right track’

Comprehensive tax reform in Congress is about as elusive as Bigfoot; people find clues of its existence from time to time, but nobody ever actually sees it. However, Congress is finally about to see a plan that tackles tax reform by targeting some fundamental problems with the tax code and creates opportunities for sustained economic growth in the process.

{mosads}The American Business Competitiveness Act, drafted and soon to be introduced by House Intelligence Committee Chairman Devin Nunes (R-Calif.), is built on three pillars that are fundamental to jump-starting the economy: a more competitive business tax rate; a territorial tax system for U.S.-headquartered companies; and full expensing for business capital investment.

The nonpartisan Tax Foundation has called his plan “bold,” and commended it as one that can drive economic growth and provide a boon to small business, with substantial increases to long-term gross domestic product (GDP). The Nunes proposal also brings about much-needed simplification to the tax code and levels the playing field among all companies regardless of how they are structured or what they produce. The economic effects of these and other aspects of his plan are estimated to create more than 1.2 million new jobs and generate more than $1 trillion in economic growth — more than the GDP of Taiwan and Austria combined.

The Nunes blueprint has strong appeal among budget hawks by not adding to the federal debt; the Joint Committee on Taxation has determined the plan to be budget neutral, while gradually lowering the business tax rate to 25 percent over a 10-year period. This is accompanied by a territorial tax system, bringing our tax code in-line with the rest of the developed world and eliminating a major international competitive disadvantage faced by U.S.-headquartered companies with international operations.

A territorial system also lessens the pressure on American companies to shift their headquarters to foreign countries with lower tax rates, a practice known as inversion. Because our current system creates a second layer of taxes on the foreign-earned profits of U.S.-headquartered companies, those companies are often worth more in foreign hands than U.S. hands. This makes inversions attractive to some American-based global companies and contributes to the erosion of the U.S. tax base.

Burger King, for example, didn’t invert from an American company to a Canadian company in 2014 because management likes hockey and long winters. They did it because Canada has a more attractive tax system, meaning Burger King could provide better value and higher returns to its shareholders. The Nunes bill would remove inversion incentives, keeping more American companies in America.

Another important provision in the Nunes plan would allow same-year deductions for capital investment in equipment, residential structures and non-residential structures. Along with removing complex and costly rules for tax compliance related to depreciation schedules, doing so would fuel domestic business investment and unleash American productivity.

The proposal also eliminates loopholes that give uneven advantages to different companies based on their particular business structure or the products they manufacture. This levels the playing field for all businesses, meaning the government would no longer be picking winners and losers, while encouraging innovation among companies of all sizes.

There aren’t a lot of members of Congress who are willing to stick out their neck on a complicated set of issues like a full-scale tax overhaul, and Nunes is to be applauded for his gutsy effort to fix America’s antiquated tax code. It deserves serious consideration in the House, the Senate and within the administration. That consideration cannot come too soon, in light of Ways and Means Committee Chairman Paul Ryan’s (R-Wis.) observation that tax reform has “got to be done by summer,” if it’s going to happen at all.

It may be ironic that it took the chairman of the House Intelligence Committee to write the most “intelligent” tax reform proposal in years but Nunes’s plan is, as the Tax Foundation noted, “on precisely the right track.” Let’s hope it’s not derailed.

Davis is a former U.S. representative from Kentucky and served on the House Ways and Means Committee. Carter was a deputy assistant secretary of the Treasury under President George W. Bush and served on the staff of the Senate Budget Committee.

Tags American Business Competitiveness Act Devin Nunes Tax Foundation Tax reform

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