President Trump and Republican Congressional leaders have released their plan for the most sweeping tax reform in decades.
“This is a once-in-a-generation opportunity,” President Trump said in a speech after the tax reform framework was released. “I’ve been waiting for this for a long time. We’re going to cut taxes for the middle class, make the tax code simpler and more fair for everyday Americans, and we are going to bring back the jobs and wealth that have left our country — and most people thought left our country for good.”
The last time our tax code received a fundamental re-working was more than thirty years ago, when most Millennials weren’t even in school, much less the workforce. Since that time, our world has become more connected and technological advances have disrupted every sector of the economy. But the only real change to the tax code is that it has steadily grown larger, more complex, and more larded with various provisions that favor the well-connected.
Our corporate tax structure has grown especially outdated. Our top corporate tax rate of 39 percent, is now the highest in the industrialized world, a result of other advanced economies moving toward revenue generators with less impact on the economy. The result leaves American businesses uncompetitive on the world stage. And although few companies pay the top rate—the result of clever tax attorneys exploiting every loophole—those distortions necessarily draw investment away from productivity and unnecessarily disadvantage smaller businesses who don’t have the money to hire an army of accountants.
The Republican tax framework would modernize the taxation of business. It would slash the corporate tax rate to 20 percent, below the average of the industrialized world, and in return would reduce certain deductions, such as businesses’ ability to deduct interest payments. It would also allow businesses to write off the costs of investments over five years rather than the current depreciation schedules up to 39 years, a move that acts as a dramatic incentive to invest in machinery and other productivity-raising equipment.
Perhaps most importantly, taxation would be done on a territorial basis, rather than the current worldwide basis, meaning that businesses would no longer be taxed twice on foreign earnings if they repatriate that money to the United States. Taken together, the changes would make the United states a more attractive location for capital and a much more friendly environment for investment, both of which should lead to increased productivity and higher wages.
The plan would also simplify the tax code and reduce rates for small businesses, allowing them to compete on a more level playing field and have more money to reinvest in their business.
“Under our crazy system, the well-connected get all kinds of carve outs, while small, family-owned businesses are stuck paying these sky-high tax rates,” Speaker Ryan said. “Tax reform will change this. Our plan lowers taxes for small, family-owned businesses. Their top tax rate will go down to 25 percent, which is much lower than what they pay today. This is going to revitalize Main Streets all across out country. It is going to mean more jobs, fairer taxes and bigger paychecks.
On the individual side, the plan would collapse the current system of seven tax brackets down to three (12, 25, and 35 percent), with the option of creating a fourth to make sure that the wealthy are paying their fair share. To offset some of the rate reductions, the plan aims to eliminate many of itemized deductions, with the exception of the mortgage-interest and charitable-giving deductions. To further simplify the system, the framework lays out a plan to double the standard deduction to $12,000 for individuals and $24,000 for couples filing jointly, which would allow people to avoid the complex, often unfair process of itemizing taxes.
“Over the last decade too many hard-working Americans have struggled to find good-paying jobs, make ends meet, provide for their families and plan for their retirement,” the framework states. “Strengthening and growing the middle class,and keeping more money in their pockets, is how we build a stronger America.”
Although discussed in terms of provisions for businesses and individuals, in reality this is a comprehensive framework singularly focused on one goal: Putting more money in the pockets of more Americans. By creating a business environment conducive to creating more investment and higher incomes, as well as provisions to create a simpler, fairer system for individuals, the Republican tax framework is a document worthy of this once-in-a-generation chance.
But this must be the beginning, not the end, of the process. Congress find the unity of purpose necessary to get this done. These opportunities don’t come around often. And after decades of neglecting our outdated tax code, the United States simply can’t wait another 30 years for fundamental change.