Can Trump Fulfill the Tax-Reform Promise?

January 5, 2017

President-elect Donald Trump spent much of his campaign promising to reduce taxes for American businesses and families. His Treasury Secretary nominee Steven Mnuchin, along with Congress, now bear the weight of seeing that promise fulfilled, namely through comprehensive tax reform. Fortunately, a healthy bipartisan appetite exists for lowering the business tax rate, simplifying the code, and applying it in a uniform fashion that does not penalize success.

There's good reason that America's antiquated and labyrinthine tax code was a frequent target on the campaign trail. Our statutory corporate rate of nearly 40 percent (combined federal and state) is the highest in the world among advanced countries.

The US statutory corporate rate of nearly 40 percent (combined federal and state) is the highest in the world among advanced countries.

That's not a point of pride. The onerous rate discourages investment, innovation, and job growth at home. Equally harmful has been its impact on the competitive fitness of American companies on the global stage, where foreign counterparts often face statutory rates in the mid-20 percent range. That disparity puts American businesses at a disadvantage in the global marketplace.

Then there is the vexing problem of inversions, wherein a US-based corporation relocates its official headquarters to another, lower-tax country. While the Obama administration viewed this phenomenon through the narrow focus of tax revenue, the incoming Trump administration appears to understand that it is, in fact, the manifest result of an inhospitable American tax structure.

As distinguished former Treasury Secretary George Shultz put it, "Inversions are a symptom. The disease is America's anomalous international tax code."

Fortunately, Trump and his Cabinet nominees recognize the need of America's business firms, large and small, for tax relief and a simplified, fair, and smart tax structure that will promote growth and jobs. House Speaker Paul Ryan, R-Wis., and House Ways and Means Committee Chairman Kevin Brady, R-Texas, unveiled just such a remedy earlier this year.

Called "A Better Way," this "blueprint" for fixing America's complex and burdensome tax system would lower the corporate rate to 20 percent, eliminate various special-interest provisions, allow full and immediate expensing of capital expenditures, and lower the tax rate for long-term capital gains and qualified dividends from 23.8 percent to 16.5 percent.

If reducing the US global trade deficit ($500 billion in 2015), preventing inversions, discouraging tax-motivated outsourcing, and curbing transfer price abuses remain objectives of the Trump administration, the blueprint's cash-flow tax—adjusted at the border at a suggested rate of 20 percent—is one way to address these issues. With border adjustment, the cash-flow tax provision would not be imposed on export receipts, while import payments would not be allowed as a business deduction from the firm's tax base.

The initial result would resemble a 20 percent depreciation in the foreign exchange value of the dollar, delighting Main Street firms that export or compete with imports, but alarming retailers, oil refiners, and other firms that rely heavily on imports. Because the border adjustment feature sharply divides the business community, President Trump will have to make the deciding call whether or not it should be included in comprehensive tax reform.

Whatever Trump decides on that difficult question, comprehensive reform offers great promise for the American economy. To illustrate, the nonpartisan Tax Foundation concluded that the blueprint approach "would raise American GDP by 9.1 percent in the long run, lift wages by 7.7 percent, and add some 1.7 million jobs." For certain, it would avoid the pitfalls of piecemeal reform, and instead provide smart guideposts for leveling the global playing field, thereby promoting growth and creating jobs at home.