In a recent Wall Street Journal op-ed, Senators Marco Rubio (R-FL) and Mike Lee (R-UT) presented more details on the 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. reform plan they have been working on over the last year.
On the individual side, the Rubio and Lee tax reform plan includes two individual tax rates (at 15 percent and 35 percent), eliminates most deductions, and eliminate the marriage penaltyA marriage penalty is when a household’s overall tax bill increases due to a couple marrying and filing taxes jointly. A marriage penalty typically occurs when two individuals with similar incomes marry; this is true for both high- and low-income couples. . It also adds an additional $2,500 on top of the existing $1,000 child tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. .
On the business side, the plan would lower the corporate tax rate, moves to full expensing, and shifts 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. .
While our previous work finds that the economy would actually grow if we eliminated the child tax credit (this is due to high marginal tax rateThe marginal tax rate is the amount of additional tax paid for every additional dollar earned as income. The average tax rate is the total tax paid divided by total income earned. A 10 percent marginal tax rate means that 10 cents of every next dollar earned would be taken as tax. s from the phase out of the credit), the business-side tax provisions in the Rubio-Lee reform proposal contain the key components of a pro-growth tax code.
Cut the Corporate Tax Rate and Move to 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.
Rubio and Lee propose a cut in the corporate tax rate and a move to full expensing.
Currently, the U.S. has the highest corporate tax rate in the developed world at 39.1 percent. This rate makes us highly uncompetitive internationally, but it also makes it expensive to invest at home.
Additionally, the current tax code requires businesses to write-off investments in capital (i.e. the tools we use to work, such as computers, tractors, manufacturing equipment, etc.) over multiple years, and even decades. Due to the time value of money and inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. , businesses are unable to fully account for the cost of these investment. This leads businesses to understate costs and overpay in taxes.
Full expensing fixes this issue by correctly defining business income. Under full expensing, businesses can claim 100 percent of business costs in the year in which the costs occur.
A lower corporate tax rate and a move to full expensing would grow the economy, increase wages, and create jobs.
Shift to Territorial
Currently, the U.S. is one of six developed countries with a worldwide system of taxation. This means that no matter where in the world a corporation earns income, it is subject to the U.S. high corporate tax rate once it brings that income back to the United States. This system places U.S. businesses at a competitive disadvantage with foreign businesses and is a major driver in the recent string of corporate inversions.
The Rubio-Lee plan would move to a territorial tax system:
“We will also propose that businesses only be taxed in the country where income is actually earned, rather than double-taxed when the money is brought back home. The way to reverse corporate inversions and bring capital in off the sidelines isn't to punish companies for obeying outmoded laws, but to change those laws to make America once again the best place in the world to pursue happiness and earn success.”
Growing the Economy
Each of the three key components of the business-side of Rubio and Lee’s tax reform plan—a lower rate, full expensing, and territorial taxation—are crucial pieces of a pro-growth tax code. If implemented, these provisions would boost investment, grow the economy, and lead to more jobs with higher wages.Share