How Congress Should Reform Business Tax
June 5, 2015
Fundamental tax reform remains a top agenda item for many in Congress, especially for House Ways and Means Committee Chairman Paul Ryan (R-WI) and Senate Finance Committee Chairman Orrin Hatch (R-UT). The country needs fundamental tax reform because the tax code is stifling economic freedom and preventing the economy from being vibrant and prosperous.
Regrettably, there is little reason to believe that the White House will be a willing partner in pursuing tax reform. President Barack Obama has never indicated that he wants to fundamentally reform the entire tax code, nor has he shown any willingness to lead such an effort. In practice, presidential leadership has proved vital for successful tax reform.
However, President Obama has said that he would like to reform only the corporate side of the tax code.
- Lower the corporate tax rate. The U.S. tax rate of approximately 39 percent is the highest among OECD countries. This high rate is likely the heaviest drag on the economy in the entire tax code. It greatly curtails domestic investment by both U.S. and foreign firms. Lowering the corporate tax rate would greatly improve the economy and job and wage growth for American families.
- Tax pass-through and C corporations at the same rate. A potential pitfall to business tax reform is the disparity between the rates that C corporations and pass-through businesses pay. C corporations pay the 39 percent combined federal and state corporate tax rate. Pass-throughs pay the individual rate 39.6 percent at the federal level, plus state income tax rates. Pass-throughs also pay an Obamacare 3.8 percent surtax.
Once Congress takes these important steps, it will have established a cash-flow tax and modernized the business tax system so that it is once again competitive with other developed countries. The American people will greatly benefit when Congress fully implements reforms business tax because economic growth, job creation, and wages will grow sharply.
Source: Curtis S. Dubay and David R. Burton, "How Congress Should Reform Business Tax," Heritage Foundation, June 4, 2015.
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