Toward a Tax Code for Tomorrow

A lot has changed in the last thirty years, especially for the economy. Technological advancements have given us instant access to a vast array of information, which has disrupted and upended entire industries. Similarly, the speed at which things travel has soared at the same time that costs have plummeted, opening up the global market to any sized businesses. Despite these massive one thing remains pretty much untouched: Our national approach to taxation.

Our economy has evolved, but our tax system hasn’t. The complexity of our tax code has accelerated (it now spans 70,000 pages of rules and regulation) just as growth in the economy has stalled. Republicans have long lamented these two trends, but now, under Speaker Paul Ryan’s leadership they’re doing something about it

“We’re going through the process of looking at what is the best way to reform the tax code and lower tax rates for businesses, and to make the American tax system internationally competitive,” Ryan said this week. “Right now it is literally one of the worst tax systems in the industrialized world. We’re losing companies who are becoming foreign companies. We have an incentive that basically tells companies: Outsource your manufacturing. Why on earth are we doing that?”

It’s a good question with a bad answer.

We’re doing that because it’s been thirty years since either party had the political motivation, determination and courage to do something about it. Tax reform is hard. But if Congress has the opportunity to put more money in the pockets of more American workers, then ‘hard’ is not an excuse.

This week, Republicans put aside excuses and held the first of many public hearings asking businesses and workers to detail what pro-growth tax reform looks like. The answers weren’t shocking, or even novel, what they were was a wake-up call that reform should have been done decades ago.

“The U.S. federal tax code was last updated over 30 years ago, in 1986,” S&P CEO Douglas Petersen testified before the Ways and Means Committee. “Its structure, however, is rooted in the post-World War II era. We have a markedly different economy today. For example, who could have foreseen the ubiquitous nature of technology in the way we conduct business today.”

Similarly, the competitive landscape has evolved as well.

“When tax reform was passed in 1986, we were competitive with other OECD countries, but ver the last 30 years, tax rates in other countries have moved from about 35 percent to about 20 percent,” John Stevens, CEO of AT&T told the committee. “This puts the U.S. at a real disadvantage.”

American competitiveness hasn’t just suffered under the burden of higher rates, they’ve suffered because policymakers have failed to keep up with the evolution toward a “territorial” taxation scheme that enables companies to pay no additional tax when they repatriate foreign earnings.

“In contrast, the United States has a worldwide system that taxes income regardless of where it is earned,” explains David Farr, the current chairman of he National Association of Manufacturers. “Thus, global U.S. companies like Emerson generally are subject to taxes in the foreign countries where they are doing business and in the United States when they bring foreign earnings back home.”

Together, the speakers pose a trifecta of problems plaguing would-be job creators in the United States. We have an outdated tax code that incentivizes investing in machines, not people, that burdens companies with one of the highest tax rates in the world, and that double taxes them if they try to bring their earnings back home. That’s a recipe for slow growth and wage stagnation, which happens to be exactly what we’ve experienced over the last several decades.

“The opportunities like this come around only once in a generation. So if we’re serious about letting Americans keep more of their paychecks, if we’re serious about bringing jobs back home, bringing manufacturing back home, then we have got to reform this tax system and seize this moment,” Speaker Ryan said last week.

He’s right. We can’t let another 30 years pass before reforming our tax code. We simply can’t expect to be a global leader in economic innovation and growth if we have a tax system built for the 1950s.