The economy has performed poorly over the past decade — suffering through a deep recession and a sluggish, at best, recovery largely due to a hostile federal policy climate. That has included anti-growth tax policies, which, according to the agenda for President-elect Donald Trump, should change markedly during his administration.
The big ills of our economy were laid out in a series of reports from the Small Business & Entrepreneurship Council:
An estimated a shortfall of $2.7 trillion in 2016 thanks to real growth in gross domestic product running at less than half the rate it should during a recovery.
A shortfall in private-sector investment over the past decade, with business investment coming up $1.1 trillion short of where it should be in 2016.
An estimated shortfall of between 867,000 and 4.8 million businesses.
A dramatic slowdown in productivity growth in recent years, with annual labor productivity growth averaging a woeful 0.4 percent from 2011 to 2016 compared to average annual growth of 2 percent from 1956 to 2016.
Lost income. If per capita real personal disposable income grew at the average historic rate since 2009, real per capita personal disposable income in 2015 would have been $2,000 higher on average for individuals and $8,000 higher for an average family of four.
A shortfall of 8.1 million jobs.
Gaps in U.S. exports, registering a shortfall as large as $635 billion in 2016, and big declines in the number of U.S. exporting firms, including 49,800 missing small exporting firms with fewer than 100 workers.
A key part of the ills hurting the economy has been tax policy, both what’s been imposed, such as the 2013 tax increase and ObamaCare tax hikes, and what’s been threatened by the Barack Obama administration, such as proposed higher taxes on domestic energy producers, discussion of a carbon tax and looming future tax increases tied to rising federal government expenditures.
The agenda presented by Trump during the campaign shifts tax policy in a very different direction. The key points in the Trump plan are as follows:
Collapses seven personal income tax brackets into three brackets of 12 percent, 25 percent and 33 percent. The standard deduction is increased for joint filers to $30,000 and $15,000 for single filers. The alternative minimum tax would be repealed.
The Trump plan would lower the business tax rate from 35 percent to 15 percent and eliminate the corporate alternative minimum tax. This rate is available to all businesses that want to retain the profits within the business. It will provide a deemed repatriation of corporate profits held offshore at a one-time tax rate of 10 percent. Firms engaged in manufacturing in the U.S. may elect to expense capital investment and lose the deductibility of corporate interest expense.
Full expensing of all new business investments. Most business tax credits and special provisions are repealed, with the exception of the research and development tax credit.
The death tax will be repealed, but capital gains at death over $10 million will be taxed. Small businesses and family farms would be exempt.
The top rate 20 percent capital gains tax would be left unchanged, but would be 15 percent for the 25 percent bracket and zero for the 12 percent bracket. Carried interest would be taxed as ordinary income, thereby raising the tax rate from 20 percent to 33 percent. However, the ObamaCare
3.8 percent tax would repealed only as it applies to investment income, reducing the effective capital gains tax rate from 23.8 percent to 20 percent.
The Trump tax plan constitutes an excellent starting point. At the same time, several questions must be clarified. It’s still unclear if non-incorporated business, which account for 95 percent of U.S. businesses, would pay the 15 percent rate. For good measure, leaving the capital gains tax rate at its current level is disappointing as it fails to further incentivize the entrepreneurship and investing critical for business creation, economic growth and job creation.
Tax changes based on policies from past presidential administrations offer more comprehensive, pro-growth, pro-entrepreneur measures of tax relief and reform that could be integrated with measures in the Trump plan. The SBE Council proposes tax reform and relief centered on a two-rate personal income tax with a top total rate of 25 percent; a capital gains tax of 15 percent, or even better, 0 percent; no death tax; a corporate income tax rate of 25 percent; and expensing as an option for all businesses. Of course, small businesses want vast simplification of the system and that needs to be a key goal in tax reform.
The Trump tax plan represents a vast improvement over the current tax code and what’s been emphasized too long on the policy front and also serves as a good start for much-needed tax relief and reform that would boost entrepreneurship, investment, business development and economic growth.