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President Trump outlined a bold set of principles for fundamental, pro-growth tax reform in Springfield, Missouri. Emphasizing simplicity, international competitiveness, and relief for the middle class, he stressed the need for Congress to seize what is a generational opportunity.
After setbacks on health insurance reforms, Americans are ready for Congress to get something big done that will grow their paychecks and improve their lives. They want a return on the investment they made by electing a Republican House and Senate.
Congress hasn’t passed tax reform since 1986. Since then, the tax code has become more complex. It’s riddled with special interest loopholes that shift the tax burden and rig the economy at the expense of ordinary Americans. There are too many tax rates and the level of complexity in the tax code comes with real compliance costs – 8.9 billion hours and $409 billion, according to the Tax Foundation – that burdens tax filers.
Last month, the “Big Six,” which is comprised of Trump administration officials and House and Senate Republican leaders – released a joint statement on tax reform. “The goal is a plan that reduces tax rates as much as possible, allows unprecedented capital expensing, places a priority on permanence, and creates a system that encourages American companies to bring back jobs and profits trapped overseas,” they said.
The statement was strong, but there wasn’t a lot of detail. Nevertheless, Speaker Paul Ryan (R-Wis.) and Ways and Means Committee Chairman Kevin Brady (R-Texas) have made it clear that they want to broaden the tax base, lower tax rates for individual filers and double the standard deduction, and simplify the tax code to the extent that the vast majority of Americans will be able to file on a post card.
Just as important is that Speaker Ryan and Chairman Brady want to make tax reform permanent.
Ensuring permanence is key to the effort to overhaul the tax system, particularly on the corporate side of the equation. This was the primary drawback of the 2001 and 2003 tax cuts under President George W. Bush. The tax cuts were temporary, initially lasting for only ten years – they were briefly extended under President Barack Obama – to comply with the rules of budget reconciliation, which mandates deficit neutrality in the second ten years.
Businesses make investment decisions based on how they can best predict the future. If Congress passes a temporary tax cut, there will be a short-term increase investment, but it will begin to decline as businesses begin to anticipate the expiration of rate cuts at the end of the ten-year window. Under permanent tax reform, businesses would know what to expect, and investment and growth will be sustained over the long term.
“A tax reform effort should hope to boost incomes for all, and a corporate income tax cut could be a means to do it,” Alan Cole of the Tax Foundation explained in a June report. “However, a large but short-lived reduction in corporate income taxes may be largely a windfall for investors, pension funds, and retirement accounts, with precious few broader benefits to the economy at large.”
And it’s not slashing rates on the corporate that is important. Speaker Ryan and Chairman Brady have proposed a major change to the tax code that would help boost investment and job creation. Known as “full expensing,” the bold idea would allow businesses to write off capital investments immediately rather than the three years to five years to 39 years, depending on the depreciation schedule, under current law.
Full expensing brings with it significant economic growth and more than 1 million jobs. Some balk at the cost of full expensing, but these costs will decline over time and spur economic growth.
Some Republicans in Congress may prefer a tax cut over tax reform because it’s easier to accomplish. That may be true, but those who prefer this approach are missing the larger point, which is boosting the economy over the long term. This will produce real and sustained growth that Americans need right now after eight years of economic policies under President Obama, during which the economy didn’t see annual growth above 2.6 percent.
Americans are going to judge Republicans on whether they were able to increase their wages and create jobs. A temporary tax cut may provide a short-term boast, but permanent tax reform for individuals and businesses will bring more certainty, producing prolonged and sustainable economic growth that will benefit every American household.
Adam Brandon is the president of FreedomWorks.