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Congressman Nunes Proposes a Bold New Approach to Taxing Business

3 min readBy: William McBride

Chronic unemployment, slow growth, and a worsening debt crisis should tell us the present course is not working. Congressman Nunes writes in today's Washington Post that a big part of the problem is how our 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. code (mis)treats business:

“We need to dramatically change the tax code so that investing is not only easier for businesses but becomes a far better option than not investing.

The current debate over tax policy focuses on whether we should raise taxes and, if so, whether to raise them on individuals making more than $200,000 a year or on millionaires. We need to talk about the bigger picture: what it takes to get people and businesses to invest their money and create jobs.

That is what the American Business Competitiveness tax reform, which I intend to introduce in Congress, would achieve. Designed to complement current congressional efforts on tax reform, the ABC tax reform would replace the business tax structure with a new form of consumption taxA consumption tax is typically levied on the purchase of goods or services and is paid directly or indirectly by the consumer in the form of retail sales taxes, excise taxes, tariffs, value-added taxes (VAT), or an income tax where all savings is tax-deductible. . Many macroeconomists recognize consumption taxes as the best tax system for encouraging capital investment and economic growth.

Most of the world’s consumption taxes are sales taxes or value-added taxes (VATs). The ABC tax reform is different — it would encourage business investment by allowing 100 percent expensing in the current year. This means that companies of any size, no matter how they’re organized, would pay no taxes on any of their spending for personnel, equipment, property or other expenditure related to the operation of their business in the United States.

Expensing — essentially, tax deductions for business investment — is allowed under the current tax code but is subject to innumerable and ever-changing conditions and limits; what a company can expense depends on a firm’s size and industry, the type of asset bought and its cost, the amount of time over which the firm can deduct costs (“depreciationDepreciation is a measurement of the “useful life” of a business asset, such as machinery or a factory, to determine the multiyear period over which the cost of that asset can be deducted from taxable income. Instead of allowing businesses to deduct the cost of investments immediately (i.e., full expensing), depreciation requires deductions to be taken over time, reducing their value and discouraging investment. ”) and whether the business is entitled to “bonus depreciationBonus depreciation allows firms to deduct a larger portion of certain “short-lived” investments in new or improved technology, equipment, or buildings in the first year. Allowing businesses to write off more investments partially 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. ” measures. By replacing this convoluted system with a uniform rule of 100 percent expensing, the ABC tax reform would quickly spark economic growth. Simply put, the more a company invests and expands, the more it reduces the percentage of its income that is taxed.

To boost growth even further, non-expensed income for all businesses would be taxed at one low, globally competitive rate — 25 percent — and all credits, special deals and loopholes on the business side would be eliminated. Because all businesses, whether a mom-and-pop grocery or a billion-dollar conglomerate, would be subject to the same clear rules and rate, special interests and big business would no longer be able to manipulate the tax code.”

Read the whole article, it’s a great illustration of all the problems that plague the tax code, including the long standing bias against saving and investing, the lack of transparency, and the vicious cycle of more loopholes in exchange for higher rates. In particular, 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. , as opposed to depreciation, addresses all of these problems in a consistent way. Most importantly, it is likely to boost investment dramatically, leading to more hiring and purchases today, and more sustainable and robust economic growth over the long run.

While we look forward to hearing more details about his plan, it is safe to say that the Congressman is on precisely the right track.

Follow William McBride on Twitter @EconoWill