Politico reported this week that Trump administration officials and congressional leaders have made “significant strides” in hammering out a pro-growth tax reform plan. If so, that would be good news for Michigan workers and businesses. They would reap tremendous benefits if Congress succeeds in retooling our nation’s woefully outdated tax code.
The last major tax overhaul occurred during the Reagan administration. Since then the tax code has grown increasingly complex, even as it has failed to keep up with the nation’s evolving economy.
Pro-growth tax reform would remove distortions that hinder economic growth, saving and investing. It would revive America as a top destination for businesses to locate their headquarters and invest their profits to create jobs and grow wages for American workers. And it would replace favoritism that bestows benefits to the well-connected with provisions that create opportunity for all Americans.
So what should tax reformers focus on?
The best way to facilitate financial security and prosperity for average Americans is to focus on doing away with the tax code’s impediments to job creation, wage growth, and business investment.
American businesses struggle in these three areas because the current system taxes corporate earnings at the highest tax rate in the developed world, traps profits earned overseas (keeping them from being invested back in the U.S.), and makes investing here more expensive than it is in most other countries. Tax reform can fix all of these problems.
Tax reform should lower the corporate tax rate. This will send a strong signal that America is open for business. At more than 39 percent, the U.S. average federal and state corporate rate is the highest in the world, ranking America at the bottom in tax attractiveness among some of our fiercest global competitors.
This high corporate rate is likely a result of a fundamental misunderstanding of who really bears the cost of this tax. Advocates for high taxes on businesses would have lawmakers and their constituents believe that corporations pay the cost of the tax. But mainstream economists note that the corporate tax is actually paid by workers in the form of lower wages. Real world evidence shows that workers bear between 75and 100 percent of the cost of corporate taxes. Nine studies have shown that the corporate income tax significantly reduces wages.
A corporate rate cut is actually a tax cut for workers. Who’d have thought?!
Another key component that is especially critical for the Michigan economy is allowing businesses to fully deduct the investments they make in the year in which they are made. Called “full expensing,” this change to the tax code would do eliminate the current system that arbitrarily treats different types of investments differently, based on myriad depreciation schedules determined by IRS bureaucrats.
Capital-intensive industries like car manufacturing stand to gain the most from such a change, enabling them to make more investments than they can under the current system. More business investment means more jobs for Michiganians.
Full expensing will be a huge driver of economic growth, creating jobs for middle class Americans at a far greater rate.
A third way to fuel growth would be to tax only that income which American firms earn in the United States. The U.S. currently taxes the overseas income of domestically-headquartered businesses — something only one other country (Eritrea) does. Junking the “no matter where you earn it, we’ll tax it” approach would help put U.S. businesses on an equal footing with their global counterparts. And it would also put a stop to tax-driven “inversions” — the absorption of U.S. business by foreign-headquartered firms.
Congress and the administration must seize this moment to provide tax relief for America. Tax reform should lower rates, simplify the tax code, allow for full expensing, and close as many special interest exemptions and loopholes as possible. Done right, tax reform can unleash the American economy like no other policy can. Time to get to work!
Romina Boccia is Grover M. Hermann research fellow in federal budgetary affairs at the Heritage Foundation and deputy director of its Roe Institute for Economic Policy Studies.
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