President Donald Trump’s tax reform speech hit exactly the right points, though you wouldn’t know it from several of the media reports.
Yet tax reform advocates who want a fairer and more competitive tax system cheered because it appears the president may have learned some lessons from the ObamaCare repeal-and-replace disaster. Here’s three reasons for their support.
The president’s role: When President Bill Clinton tried his hand at comprehensive health care reform in 1993, he set up a White House task force that controlled the process, releasing its draft legislation after eight months of behind-closed-doors deliberations. Congress then mostly ignored it, as members began drafting their own bills. The delay gave critics time to attack the plan, which lost momentum and doomed Clinton’s efforts.
Trump, by contrast, took a hands-off approach on health care reform, largely playing the part of cheerleader. But congressional Republicans were divided, arguing among themselves and dithering away precious time. Like Clinton, they lost momentum and the tide of opinion changed.
President Barack Obama did it right. He laid out eight health care “consumer protections” he wanted in a speech to a joint session of Congress, providing both principles and direction for the Democratically controlled Congress. And Democrats eventually delivered.
Trump now seems to be following the Obama model, identifying some basic principles he wants in tax reform but leaving the task of writing and passing a bill to Congress.
The president’s principles: The president named four.
- The tax code needs to be simple and easy to understand.
- The corporate income tax rate should be competitive with other developed countries.
- Tax reform must provide relief to middle-class families.
- The country needs to “repatriate” trillions of dollars in U.S. corporate profits sitting in overseas banks.
Can I get an amen?
Unlike the repeal-and-replace effort, there is broad bipartisan support for Trump’s tax reform principles, though how to achieve them will be a battle.
Trump wants to lower the corporate income tax from 35 percent — the highest in the developed world — to 15 percent. House Republicans are pushing a 20 percent rate. In 2012, Obama proposed lowering it to 28 percent.
Both Obama and Trump have called for simplifying and streamlining the tax code by reducing the number of tax breaks. Generally speaking, the lower the tax rate the more willing companies are to give up tax breaks and loopholes, which means Congress should push for the lowest rates possible.
Some critics will demagogue lower corporate rates as a sop to big business, demonstrating they don’t understand the modern economy.
We live in a global economy. According to the Tax Foundation, the average 2016 corporate tax rate across 188 countries was 22.5 percent. The average rate for Europe, one of our biggest competitors, was 18.88 percent — about half the U.S. rate.
The higher U.S. corporate tax rate translates to higher prices or lower wages, making U.S. products and services less competitive. One of the reasons U.S. companies have been setting up operations in other countries or merging with foreign-based companies, known as inversions, is so they fall under the foreign country’s lower tax rates. A 20 percent — or better yet, a 15 percent — corporate tax rate would reverse that trend and even lure companies back.
And it would address the tendency of multinational companies to leave money in foreign bank accounts. U.S. companies pay the foreign taxes due in the countries where they operate. The reason they don’t bring after-tax profits home is they have to pay the U.S. government the difference between the low foreign rate and the high U.S. rate. Significantly lowering the U.S. rate will largely solve that problem because there would be little or no difference.
The president’s focus: Trump made it very clear that his goal in tax reform is to create jobs and spur economic growth — which are two sides of the same coin.
President George W. Bush pushed through two sets of tax cuts, in 2001 and 2003, but their economic impact was minimal because not all tax cuts are created equal.
Tax breaks that help families pay for education or child care are nice, but they have almost no impact on economic growth. Cutting the corporate tax rate and allowing for immediate expensing of business spending will — and both are key Republican tax reform provisions.
Trump is right that tax reform is essential to U.S. economic growth, job creation and global competitiveness. He has proposed his principles. Now it’s time for Congress to do its job.