Corporate Tax Reform: The Path to Economic Growth

Ross Marchand

September 27, 2017

September 26 through October 1 is Tax Reform Week for the Taxpayers Protection Alliance (TPA).  Leading up to, and after our press conference with the National Taxpayers Union on Thursday, September 28 at 10:15 am at the House Triangle (media advisory here), TPA will be highlighting the need for comprehensive tax reform.  Our second installment outlines the importance of corporate tax reform.

Corporate tax reform is finally on the table, as the “Big Six” promises the biggest changes to the code in decades. Lawmakers are expected to propose lowering the rate, now the highest in the developed world, from 35 percent to 20 percent. Deductions will also be limited, with resulting savings paying for the overall rate reduction.

A recent study by economists Ike Brannon, president of Capital Policy Analytics, and Andrew Hanson, associate professor of economics at Marquette University, demonstrates tax reform’s transformative potential.  The study shows that setting a fair corporate tax rate will boost employment and wages by incentivizing investors to push capital into our economy. According to Brannon and Hanson, reducing the corporate rate by 10 percent – 20 percent, the range that President Trump and Republican Congressional leaders have proposed, could boost employment by 2 percent – 10 percent and increase wages by 3 percent – 12 percent.

Moreover, such estimates are likely understated in that onerous tax preparation costs are not fully taken into account. Business owners have also grown weary of the cumbersome filing process that creates just another barrier to hiring and expanding. The gargantuan preparation costs and actual tax paid are passed along to workers and consumers, ensuring that the misery is spread around in the widest way possible. The rest of the developed world realized years ago that the corporate tax rate is a terrible way to fund government, and lowered their levies accordingly. In 2017 alone, eight countries lowered their corporate rates. The “social democracies” of Denmark, Sweden, Norway, and Finland all have rates south of 25 percent.

But getting the rate right is only part of the equation. Currently, firms trying to write-off assets such as computers and furniture must grapple with a complicated depreciation schedule which favors some industries but condemns others to high tax burdens. Firms focused on acquiring the latest technologies are especially at a disadvantage, given how quickly the lifespan of “average” machines change. The “Big Six” tax proposal will likely remove these distortions by allowing businesses to write off 100 percent of the value of business assets in the first year of ownership. This proposal wisely encourages businesses to invest in new technologies needed to grow their operations, rather than fretting about specific IRS deduction rates.

With the proposed plan comes one key caveat: the removal of interest deductibility for businesses. Under the current tax code, companies can finance their growth through borrowing money, and writing off any interest payments off of their taxable income. Struggling, debt-reliant industries such as real estate benefit immensely from interest deductibility, and are lobbying heavily against any limitation. Proponents of nixing interest deductibility claim that the provision is constantly gamed by companies that borrow money from other companies with lower tax rates.  

But disallowing interest deduction would amount to a double tax, since each dollar expended by a borrower to repay a lender would be taxed on the tax returns of both parties. And of course, double taxation distorts decision making by rendering debt artificially more expensive than other forms of financing.

Congress and the Executive Branch can navigate the thorny issues of asset expensing and interest deductibility by permitting one while limiting the other will inevitably favor certain industries over others.  Rather than choose winners from losers, Congress should permit companies to “go their own way” on tax reform and choose between immediate expensing and interest deductibility. According to the Tax Foundation’s analysis, letting companies choose between the two benefits would add around $120 billion to the economy over the next ten years, compared to the failed status quo. Additionally, the proposal would show that large debtor companies and their nimbler, investor-funded competitors needn’t be foes in the tax reform process. Bringing everyone around the table ensures that future legislative efforts are built on collaboration, not disarray.

With this unity, tax reform can be enacted that slashes rates, levels the playing field between companies, and propels economic growth for decades to come.