This week, Congressman Devin Nunes (R-CA) introduced the “American Business Competitiveness Act” (H.R. 4377). This plan would reform the business tax code. It basically enacts a cash-flow taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. for businesses, which would greatly simplify the calculation of tax and would make the code much more pro-growth.
Details of the plan:
- Cutting the corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. to 25 percent;
- Limiting the top tax rate on non-corporate business income to 25 percent;
- Allowing businesses to deduct investment costs when they occur (full expensingFull expensing allows businesses to immediately deduct the full cost of certain investments in new or improved technology, equipment, or buildings. It alleviates a bias in the tax code and incentivizes companies to invest more, which, in the long run, raises worker productivity, boosts wages, and creates more jobs. );
- Eliminating most business tax credits and many deductions;
- Moving to a territorial tax systemA territorial tax system for corporations, as opposed to a worldwide tax system, excludes profits multinational companies earn in foreign countries from their domestic tax base. As part of the 2017 Tax Cuts and Jobs Act (TCJA), the United States shifted from worldwide taxation towards territorial taxation. like most developed nations;
- No longer letting nonfinancial businesses deduct interest costs but no longer taxing them on interest receipts;
- Applying the same tax-rate limitation to individuals’ interest income as now applies to their capital gains and dividend income; and
- Eliminating the individual and corporate alternative minimum taxes (AMTs).
We found that the plan would reduce federal revenues by $1.6 trillion over a decade on a static basis once the plan is fully phased in. The plan would result in a 7.3 percent higher GDP, 6 percent higher wages, and 1.4 million new full-time equivalent jobs in the long run. The growth from this plan is the result of the drastically reduced cost of capital from both full expensing of capital investments and the lower business tax rates. The larger economy would mean that the plan would end up raising revenue (approximately $631 billion over a ten-year period).
Table 1. The Nunes Plan Would Increase Jobs, Wages, Investment, and GDP |
|
|
Economic and Revenue Estimates of the Nunes Business Tax Plan vs. Current Law |
|
|
GDP |
7.3% |
|
$GDP (annual gain relative to 2015 economy) |
$1,290 |
|
Private Business Stocks (equipment, structures, etc.) |
22.1% |
|
Wage Rate |
6.0% |
|
Private Business Hours of Work |
1.5% |
|
Full-Time Equivalent Jobs (in thousands) |
1,401 |
|
10-Year Static Federal Revenue Estimate, 2015-2024 ($ billions) |
-$1,638 |
|
10-Year Dynamic Federal Revenue Estimate after GDP Gain or Loss, 2015-2024 ($ billions) |
$631 |
|
Weighted Average Service Price |
% Change |
|
Corporate |
-11.9% |
|
Noncorporate |
-11.7% |
|
All Business |
-11.9% |
|
Source: Tax Foundation Taxes and Growth Model (October 2015 version). |
The Nunes business tax reform plan reflects what is becoming the norm. The plan is very similar to what some presidential candidates have introduced during the 2016 presidential campaign. Governor Bush, Dr. Ben Carson, and Senator Rubio have released comprehensive plans that include the significant features of the Nunes plan: full expensing, a lower marginal tax rate on businesses, and the elimination of the interest deduction. Combined, these specific business reform proposals would be a huge improvement over the current tax code.
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