Rubio and Lee Present Pro-Growth Business Tax Reforms
September 24, 2014
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 penalty. It also adds an additional $2,500 on top of the existing $1,000 child tax credit.
On the business side, the plan would lower the corporate tax rate, moves to full expensing, and shifts to a territorial tax system.
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 rates 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 Expensing
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 inflation, 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.