The One Thing Every Tax Proposal Needs
(This article first appeared on TheHill.com.)
While the president’s joint address to Congress didn’t give detail on his tax reform approach, the debate is coming. Tax reform is in the air. And the issue of expensing — the tonic for national competitiveness and economic growth — is one provision that should be included in every proposal, and remain in every iteration, as Congress and the Treasury grapple with the path forward to achieving tax reform.
While the Trump administration will release its proposal in the coming weeks, the House Republicans have put forward a blueprint based on their campaign ideas. Their proposal links tax simplification and relief with a more competitive business tax system. Here they have inevitably encountered a challenge: As a trade-off for lower corporate rates, better enforcement, and a new job friendly territorial levy, House Ways and Means Committee Republicans have embraced a revolutionary but controversial "border adjustment " of business taxes to equalize the tax burden on domestic and foreign production.
The Border Adjustment Tax (BAT) has attracted predictable controversy, with skepticism from retailers, energy companies and producers that depend on overseas supply chains. Yet the BAT also provides a critical resource for the House GOP blueprint: a revenue windfall of $1 trillion. This revenue finances lower rates and investment incentives that, according to the Tax Foundation, will overnight transform the tax competitiveness of the United States.
The House Republican plan offers a pathway to tax reform that promises economic transformation. Still, major factions in the business community are weighing their enthusiasm for tax reform against immediate imputed costs from the BAT.
Many tax reformers are hunting for an alternative system to simplify the code and lower rates. For even the most inventive tax visionaries, the replacement of BAT revenues is a daunting task, even if you incorporate controversial novelties like financial services levies or the hearty perennial: the carbon tax.
The result is that some would risk trading away the most important, little-noticed reform tucked into the House GOP plan: expensing.
Tax initiatives that permit rapid recovery of capital investments have a long-proven history of boosting the economy and attracting broad political support. Rarely has the idea of immediate write-offs for businesses attracted the enthusiasm it deserves, but it always garners bipartisan support. Expensing incents critical capital investment that would otherwise be unprofitable. In the process, it elevates worker productivity and industrial competitiveness, attracting global capital to a higher performing domestic economy. An expensing regime, replacing cumbersome and retro depreciation systems, would flood the American economy with seed corn and provide economic stimulus more robust than any conventional infrastructure program.
Research by the Tax Foundation confirms what many tax policy leaders have understood for years. Expensing does more to raise GDP, wages and employment than any other component of the House GOP blueprint. Over time it would raise capital stock by an estimated $4 trillion, modernizing the American economy. This tax provision accounts for half of the projected growth from the entire tax reform, so much so that the expanded tax base from expensing would lower budget deficits and improve the ratio of debt to GDP. This unheralded reform would dramatically advance the domestic priorities of the administration and the majority in Congress.
As the Senate and House grapple with a new tax code, the tough decisions facing lawmakers in a superheated partisan environment will tempt many to embrace less robust reforms, or policies they can distill on bumper stickers. Seasoned leaders such as Speaker Paul Ryan should stay the course and insist on transformative tax changes, like expensing, that move the American economy to the front of the line.
Former Rep. Phil English (R-Pa.) was a member of the House Ways and Means Committee.