For millions of Americans, tomorrow is tax day … which once again reminds us that it has been 31 years since our country enacted major tax reform, leaving us with an antiquated and complicated tax system that inhibits job creation, economic growth, and global competitiveness. As Senate Finance Chairman Orrin Hatch (R-UT) said when he visited the Chamber in February, we desperately need comprehensive, pro-growth reform. We couldn’t agree more – tax reform should:
- lower rates for all businesses;
- level the playing field for American companies competing in international markets and welcome foreign investment within our borders;
- provide faster cost recovery — putting money back in the hands of businesses to create jobs and invest more;
- reduce the complexity of the code; and
- provide appropriate transition rules.
Let’s take a deeper dive at why tax reform is so essential.
Our last major tax overhaul occurred in 1986 – the same year that Mike Tyson won his first boxing title, the Chicago Bears shuffled their way past the New England Patriots to win the Super Bowl, Top Gun dominated at the box office, and we were still watching home movies in Betamax (google it, kids!). In other words, it’s been a while! Our combined marginal corporate rate of 39.1% is exceeded only by the United Arab Emirates and pass-thru entities face tax rates that exceed 50% in some states. Not only are our rates global outliers, over the past 15 years all other countries have significantly lowered their rates — so simply by standing still we are falling further behind.
The harm of high rates is compounded by our worldwide system of taxation. The U.S. taxes companies on their worldwide income, so if they earn money abroad, they pay taxes there, and they are still subject to U.S. income tax when they bring it home. In sharp contrast, most industrialized nations operate under a territorial system. Their firms that earn money abroad pay tax abroad but they aren’t subject to pay that second level of tax when they bring it home. The result discourages profitable foreign investments by U.S. firms and a lockout effect where cash earned on past investments cannot be efficiently returned to the United States where it could drive economic growth, job creation, and investment.
In addition to the global disadvantage caused by uncompetitive rates and an outdated worldwide system, our current code is oddly biased against investments such as new equipment, machinery, and buildings. Tax reform that allows for full expensing could remedy this so that we can clear a path for the sort of investments that lead to more jobs and higher wages.
Finally, adding insult to injury, the pleasure of complying with the morass we currently call the Internal Revenue Code isn’t cheap or easy; taxpayers spend 6.1 billion hours and $234 billion per year on tax compliance. Further, this number is expected to rise another 2 billion hours and many more billions of dollars in the next few years. These resources, both monetary and human, would be better spent on creating jobs and driving investment.
So it’s pretty obvious we desperately need comprehensive, pro-growth tax reform now. When it comes to boosting growth in the long term, there’s little we can do in policy that compares to tax reform. So why haven’t we reformed the tax code? Because it’s hard. A quick flip through cable news shows reveals that even with single party control in Washington, finding consensus is tough. Just look at the challenges on health care.
But that is not an acceptable excuse. We have to stay at the table and work through the challenges because that is what this country needs to grow, compete, and win. This is not an optional exercise, nor is it simply part of a political platform. The need for reform is real.
Bottom line? Our outdated and convoluted tax system is a real problem that isn’t going away and we need action now so American businesses can succeed. True pro-growth, comprehensive tax reform can, dare I say, make America greater. So let’s get to work!
NOTE: On Thursday, April 20th at 11:00am EDT, U.S. Chamber Vice President of Tax Policy, Caroline Harris, participated in a Facebook Live discussion about the state of America's tax system. Watch it here or below: