As Congress resumes its work on tax cuts in September, legislators should look back to history for guidance.
When President Reagan signed the bipartisan Tax Reform Act of 1986 more than 30 years ago, cell phones were still a pipe dream, let alone Facebook, Snapchat, and Twitter. Since then, technological revolution and rapid globalization has altered the U.S. economy forever, and the 70,000 page U.S. tax code has remained woefully inadequate at keeping pace.
In today's day and age, most major U.S. companies at least partially conduct operations abroad. And, unfortunately, their profits are staying there. According to London-based Capital Economics, corporate earnings reinvested abroad total $2.6 trillion, ballooning by 700 percent since 2002.
With the U.S. boasting the industrialized world’s highest corporate tax rate of 35 percent, multinational American companies are incentivized against repatriating overseas earnings. When you consider the global average corporate tax rate is 22.5 percent, it’s no wonder they look abroad.
But global competitiveness shouldn’t come at the expense of American tax revenue. Apple CEO Tim Cook has admitted that he would “love to” bring home the company’s roughly $181 billion in foreign profits, were it not for the U.S.’s prohibitive corporate tax.
As a cornerstone of his campaign, President Trump proposed cutting the corporate tax rate to 15 percent, putting the nation on better footing to compete with Europe and Asia. Even a more modest 20 to 25 percent corporate tax rate, which congressional Republicans consider more realistic, would clock in below a large swath of the European Union. Ireland, for example, boasts a 12.5 percent corporate tax rate.
But the best part of the Trump tax plan is its incentive to repatriate overseas earnings at a 10 percent tax rate, effectively subverting Ireland’s 12.5 percent levy. According to The Los Angeles Times, Ireland’s English-speaking workforce and friendly business climate has driven roughly 700 U.S. companies to hold $300 billion across the ocean.
President Trump has also proposed a 15 percent pass-through tax rate, which would help small businesses create jobs around the country. As it stands now, the overwhelming majority of America's small businesses (95 percent) are federally taxed as pass-through entities, which means their income is “passed through” to their owner to be taxed at his or her highest marginal individual tax rate. This can reach 40 percent in certain cases. Combined with state and local taxes, small business owners can pay up to 50 percent of their income in taxes. This is money not being reinvested into the economy.
If the White House and Congress work together on tax cuts, they can make our economy great again.
Jimmy Greene is president and CEO of the Associated Builders and Contractors in Michigan.
Editor's Note: This article has been updated since initial publication.