Election affords an opportunity for tax reform

Raymond Keating
Raymond Keating

The political wave that hit American politics on election day must not go to waste when it comes to moving public policy in a different and productive direction. Perhaps the greatest opportunity to make a significant contribution to boosting our economy in the near term and over the long haul is comprehensive, pro-growth tax reform.

Over the past eight years, in assorted ways, public policy at the federal level has imposed additional costs and created uncertainties that pushed our economy into a deep, long recession and subsequent poor economic recovery. These public policy woes most certainly include taxes.

n Obama tax increases: Consider, for example, the significant tax increases imposed during the Barack Obama administration, including higher personal income, capital gains, dividend and death taxes as well as new or increased taxes on insurance companies, pharmaceutical manufacturers and medical device makers. For good measure, in his 2015 budget plan, the president called for further tax increases, including higher capital gains and death taxes; a major tax hike on carried interest; elimination or limitation of assorted deductions raising taxes on income earners in the 33 percent, 35 percent and 39.6 percent tax brackets; and increased levies for financial and insurance firms and domestic energy producers.

n Uncertainty and investment roadblocks: And then there’s the uncertainty factor that restrains economic activity, including business investment. For example, from 2010 to 2013, small business (Section 179) expensing of capital expenditures was allowed up to $500,000. That is, small businesses could immediately and fully deduct capital expenditures in the year made. However, at the start of this year, that level fell to a mere $25,000. Interestingly, this is an area where President Obama and the new Congress will be in agreement and could serve as a starting point for a larger tax reform effort.

n Globally noncompetitive corporate tax rate: A major area of taxation that makes the U.S. and American businesses uncompetitive in the global marketplace is our high corporate income tax rate. The corporate income tax rate comes in at

35 percent and can top 41 percent when state tax rates are factored into the equation. That’s the highest tax rate among developed nations. And it’s a negative for small businesses as well as for large ones given that among employer C corporations (latest Census Bureau data), 99.2 percent had less than 500 workers and 86.4 percent had fewer than 20 employees. There seems to be some bipartisan agreement this tax rate needs to come down and dramatically so. Indeed, reducing the corporate tax rate must be part of any tax reform effort, and if achieved, it would be a big plus for investment and business growth in the U.S. At the same time, this is where more serious challenges and differences emerge that must be dealt with if reform is to move ahead. Specifically, while tax reform efforts in the past have generally strived to maintain revenue neutrality, there has been a great deal of talk this time around, including by the Obama White House, to use corporate tax reform as a means for increasing taxes.

Of course, much more would have to be addressed under comprehensive tax reform, including personal income taxes (after all, more than 92 percent of businesses file taxes as individuals as sole proprietorship, partnerships and S corporations and therefore pay personal income taxes rather than corporate income taxes); capital gains taxes; death taxes and taxes on foreign income of businesses.

Finally, it also must be recognized the tax increases of recent years have slowed economic growth by shifting resources away from the private sector and to government while also diminishing incentives for working, investing and entrepreneurship. Indeed, our economy has badly underperformed in terms of economic, income and employment growth for several years now. Therefore, a true, pro-growth tax reform effort can in no possible way raise taxes, but instead, must roll back the tax hikes of recent years.

Pro-growth tax reform needs to focus on substantially reducing tax rates on personal and corporate income, eliminating levies on capital gains and killing death taxes, for example.

Is the new Congress capable of achieving true, pro-growth tax reform? I see no reason why not. The big question, of course, is whether or not President Obama can see the enormous economic benefits of reforms that effectively contradict most of the tax policies he has imposed and advocated throughout his presidency and sign such reform into law.