It is a tough task addressing tax reform here because we have no idea whether Congress will do its job or how they will do it. But let us examine what needs to be done to help businesses, especially on the issue of federal income tax.
Businesses with 500 or fewer employees are the cornerstone of our national economy. According to the National Federation of Independent Business, there are 19.6 million of them in America, accounting for 99.9% of all businesses. They employ 58 million workers and about 75% of them pay taxes as individuals at a top rate of 43.3%. The regular corporate rate is 35%, which is higher than countries like Ireland (12.5%) and China (25%).
"The public must recognize that taxation creates a disincentive for U.S. businesses to invest, so the tax code has a negative impact on the economy."
To comply with the nation’s 70,000 pages of federal tax code, these small businesses together spend about 2 billion hours and $18 billion annually. And they are not helped one iota by the 4,000 tax lobbyists in Washington or the tens of thousands of additional lobbyists who protect big-business interests by distorting the tax codes while supporting the political establishment to curry favor.
Wise heads think that the likeliest scenario is that a modest set of tax cuts disguised as reform may be enacted by year end. A tax-cut package called “reform” is a danger because it cannot allow out-of-control deficits while aggravating inequities of existing features. Failing to raise adequate revenues while not correcting existing problems encourages behavior such as “inversions” to foreign locales.
Data for 2015 indicates that U.S. companies have $2.5 trillion in cash overseas – that’s one-third of the annual budget. That money is there to avoid paying U.S. taxes upon “repatriation” of it to America. It is obvious that what we need in tax reform is something simple, efficient, equitable and predictable.
The public must recognize that taxation creates a disincentive for U.S. businesses to invest, so the tax code has a negative impact on the economy. Politicians all talk about the following elements of reform:
- Eliminate the estate tax
- Limit itemized deductions
- Cut the corporate tax rate
- Eliminate personal exemptions
- Increase the standard deduction
- Create individual tax-rate structure of 12%, 25% and 33% (down from seven categories)
- Eliminate the alternative minimum tax
- Lower the tax rate on capital gains
- Provide a lower top rate for pass-through business income
At the time this column was written, there was no way to determine outcomes. What we think we know of pending plans in the bill being formulated in Congress covering businesses includes: cut in corporate tax rate to 20% (not 15%), limits on corporate interest deductions, a one-time tax on stockpiled foreign profits, immediate investment write-offs, repeal deductions for domestic manufacturing, tax breaks for research and tax-free repatriation of future foreign profits.
What we do not yet know about businesses future in the reform bill includes: details on interest deduction limits, rules on shifting profits abroad, rules on owners reclassifying wages as income, what existing tax breaks survive, conditions on investment write-offs after five years and how much tax plan adds to deficit.
A guide to all of these issues is available from The Heritage Foundation in a Backgrounder paper No. 3192, dated Feb. 10 2017, written by David R. Burton. This is as fine a discussion in a dozen-page document as you can hope to read on tax reform. The five key points made include:
- The current tax system is economically destructive and, due to complexity, imposes high compliance costs.
- High marginal tax rates inhibit the economy, distort competition and are too complex for practical adherence.
- Reform is essential to restore fairness for American society.
- The best way to achieve prosperity goals is to establish a consumption base with low marginal tax rates.
- If appropriate tax reform is passed through Congress and becomes law, America would see enhanced incomes and opportunities.
Your job is to contact your Congressman and two Senators and instruct them to get this job done. Without performance they must be recalled or thrown out of office.