By Stephanie Brown
Having worked in the financial services industry for the last 10 years and working closely with a serial entrepreneur, I have observed the differences in operations among small and large businesses and how government decisions can have a vast impact on business — primarily as it pertains to taxes, tax regulation and our current tax code.
Soon, we will have legislation before Congress that, when passed, will have a highly favorable impact on business investment, raising productivity and overall economic growth. I further expect that the new tax rules will have significant effects on foreign economies. Even beyond these obvious benefits, major tax reform will be a boon to all Americans, from the low-income and middle class families, to corporate America. Reforming our tax code is a direct pipeline to better jobs for all Americans and more money to purchase products and services.
The complexity of our current progressive tax system is mind boggling. Over the last century, the Internal Revenue Service has compiled more than 7.5 million words of tax regulations. The intended goal is to clarify how the U.S. tax statutes work in practice.
According to tax experts, there are about 60,000 pages of tax-related case law, which are indispensable for accountants and tax lawyers trying to figure out how much their clients actually owe.
We need to simplify the tax code so that it is comprehensible to all U.S. citizens and offers lower tax rates for low and middle income earners. Most importantly, let’s take the burden off employers.
It astounds me that our current 35 percent tax rate on corporate profits is the highest among all industrial countries. The House Republicans and the Trump administration have proposed reducing this rate by half, which would cause capital to shift to corporate investments, businesses, and jobs. I believe this is a must if we truly wish for this country to thrive.
Martin Feldstein, professor of economics at Harvard University and president emeritus of the National Bureau of Economic Research, noted that the United States is unique among industrial countries in subjecting repatriated profits earned by its companies’ foreign subsidiaries to the full domestic tax rate (with a credit for tax paid to the foreign government). “Thus, a U.S. firm that earns a profit in Ireland,” he
said, “pays a 12 percent tax to the Irish government and would now pay an additional 23 percent on any repatriated profits. Not surprisingly, U.S. firms choose to keep their profits abroad.”
I agree with Professor Feldstein and President Trump’s economic advisors that adopting a territorial system would increase investment in the United States, stimulating productivity and growth. The proposal would allow all future foreign profits of U.S. corporations to be repatriated without any extra tax. The $2.1 trillion of previously accumulated overseas profits would be subject to a one-time tax of about 10 percent, to be paid over several years.
Let me add that we must do the right thing for small business owners, two-thirds of whom say high taxes threaten the viability of their business. We have more than 28 million small businesses in the United States that employ more than 85 million people. These businesses are the very backbone of the U.S. economy, and yet must subsist month-to-month. These businesses are desperate for relief, and we must listen.
On March 7, Reps. Randy Hultgren of Illinois and Jason Smith of Missouri introduced the Bring Small Business Back Tax Reform Act (H.R. 1425) that would reduce the tax burden on American small business job creators. The bill would lower the tax rate on the first $150,000 of earnings to 12 percent and to 25 percent for all earnings above that threshold, allowing businesses to invest more in hiring, expansion, and their communities. Let’s get this passed and enacted!
I also support a cash-flow corporate tax. This tax will allow companies to deduct all investments in equipment and structures immediately, instead of spreading the cost over time; and eliminating the deduction for interest costs on newly incurred debts. This would reduce the risk caused by high-debt ratios and put debt and equity on an equal footing.
We should also incorporate a border tax adjustment. Unlike most other countries, the United States does not have a value-added tax. The border tax adjustment would give us the international advantage of a value-added tax without levying that tax on domestic transactions. A border tax adjustment could lead to an increase in the value of the dollar by 25 percent relative to other currencies. This rise in the dollar lowers the real cost of imports by 20 percent — just enough to offset the increase in import prices caused by the tax. Even with a higher dollar, exporters would benefit by not being taxed on what they sell abroad, thus allowing them to lower export prices.
This tax reform would greatly enhance economic performance by fixing current impediments to businesses, individuals and national growth. The time for tax reform is now.
Stephanie Brown is vice president of marketing and public relations for the Manchester Financial Group in San Diego.