In his first address to a joint session of Congress, President Donald TrumpDonald TrumpMcCain says he hasn't met with Trump since inauguration Mulvaney: Let states figure out 'essential health benefits' How President Trump can restore sanity to America's labor laws MORE clarified his commitment to comprehensive tax reform with this sober truth: “we must restart the engine of the American economy – making it easier for companies to do business in the United States, and much harder for companies to leave…we must create a level playing field for American companies and workers.”
Reaction within the chamber was immediate and rousing. The reception in homes and corporate boardrooms across America must have been equally enthusiastic: In the more than 30 years since Congress last overhauled the tax code, U.S. businesses, both large and small, have been burdened by tax rates that are both too high – 39 percent, combined state and federal – and totally out of step with our competitors around the globe, who enjoy a top average rate of 22.5 percent, which steadily has been on the downswing from a 2003 high of 30 percent.
Fortunately, President Trump’s allies in Congress have devoted significant attention to solving the problem, resulting in the tax reform blueprint crafted by House Speaker Paul RyanPaul RyanObamaCare gets new lease on life Ellison to Dems: Don't gloat, get ready for round 2 Trump blames Democrats for ObamaCare defeat MORE (R-Wis.) and House Ways and Means Committee Chairman Kevin BradyKevin BradyThe right approach to promoting competition in the health care marketplace GOP rushes to vote without knowing full impact of healthcare plan Overnight Healthcare: Trump threatens to leave ObamaCare in place if GOP bill fails MORE (R-Texas). Called “A Better Way,” this plan would, among many other things, lower the corporate income tax rate to 20 percent, cap the small business rate at 25 percent, and eliminate and streamline various exclusions, deductions, and special-interest provisions. Allowing for full and immediate expensing of investments, it would encourage capital formation by lowering the tax rate on long-term gains and qualified dividends from 23.8 percent to 16.5 percent.
Given the dramatic surge in corporate inversions in recent years – with household names like Johnson Controls, Pfizer, and Burger King publicly flirting with relocating their operations and headquarters to lower-tax countries overseas – members of both political parties have promised solutions. The tax rate reductions inherent in the Ryan-Brady plan are just one measure designed to encourage American companies to maintain their physical presences, their investments, and the tax revenue they generate here at home. Another is the territorial system of taxation.
While our uniquely business-hostile tax rate is likely the most compelling driver of corporate inversion, a close runner-up might be America’s distinction as one of the very few OECD countries that maintains a worldwide tax system. Whereas most countries – 27 of the 34 OECD member nations – operate under a territorial system that assesses taxes only in the countries in which profits are earned, American-based countries that do business abroad are also saddled with corporate taxes here at home. The Ryan-Brady plan would shelve the antiquated worldwide system, in favor of the fairer, more hospitable, business-welcoming terroritial system. Companies would be less inclined to relocate overseas, as they would be taxed based on where they sell their goods, rather than where they produce them.
The best news is that the non-partisan Tax Foundation has undertaken an extensive examination of the Ryan-Brady blueprint in total, determining that it would represent a $2.4 trillion tax cut for the American taxpayer, resulting in an increase in after-tax income for the typical middle-class family of up to $4,600 per year. It would also “raise American GDP by 9.1 percent in the long run, lift wages by 7.7 percent and add some 1.7 million jobs.”
It’s hard to argue with a comprehensive, pro-growth tax reform plan that would fix our broken system, boost American competitiveness, incentivize U.S. businesses to remain within our borders, and allow American workers to keep more of their hard-earned paychecks. Lawmakers in Congress and the Trump administration can notch a victory for all Americans by embracing the Ryan-Brady tax reform blueprint.
William F. Shughart II, research director of the Independent Institute, is J. Fish Smith Professor in Public Choice at Utah State's Huntsman School of Business, and former Chief Economist at the Federal Trade Commission.
The views expressed by this author are their own and are not the views of The Hill.