Tax Reform -- The Growth Code 2.0
We are creating opportunities for all Americans by encouraging businesses to invest in America and to make our system simpler and fairer for everyone! OUR SIGNATURE ISSUE: “The Growth Code”. Updated and revised due to the adoption of the Tax Cuts and Jobs Act (TCJA), passed in 2017 and signed by President Trump.
In 2010, with advice from our economist, we established the key signature issue for Free Congress/American Opportunity Foundation (FCF/AO): “The Growth Code”. This was based on the assessment that slow growth was placing economic stress on the working men and women of the United States. The United States economy has grown an average of 3.2% over the history of the Republic.
The economic policies in the years preceding 2010 were resulting in growth well below that rate. Unemployment in 2010 was high, wages were stagnant, businesses were not investing, and economic growth of the U.S. was relatively flat. As such jobs were scarce, especially for our youth entering the marketplace. We observed that the U.S. had lost ground during the “Great Recession” of 2008-2010. The historic growth rate of 3.2% that provided for American well-being had dipped. Even if the growth rate recovered to its normal upward trend, the losses due to the recession would not be recaptured unless economic growth exceeded 3.2%, to make up for those losses.
We at FCF/AO believe that a comprehensive reform including tax cuts would cause the economy to grow. Simply taxing and spending would not spur the business investment that would increase productivity and add new jobs. The result of such a tax and spend policy is that eventually one runs out of money to tax and spend. We at FCF/AO believe that the only way to secure the best future for all American was to add new wealth into the society that would benefit everyone. The “Growth Code” was our proposed solution, published in 2010.
The FCF/AO “Growth Code” is based on five major proposals, which taken together would spur the economy to grow. The full “Growth Code” can be found on our webpage at americanopportunity.org. The proposals are summarized as follows:
First, a unified 15% business tax on all business activity, large or small, “pass-through” individual, or corporate.
Second, the “Growth Code” called for three tax brackets for personal income tax of 10%, 15%, and 25%., and everyone would be subject to the tax.
Third, the growth code called for every citizen to pay his fair share of taxes. This is a duty of citizenry and gives every citizen a stake in good tax policy. However, to cushion the poorest among us, the Growth Code called for a family credit of $4,300, relieving the poorest of tax liability.
Fourth, investment in plant and equipment would be Immediately deductible from a corporation’s tax. Such a provision almost commands investment and growth.
Fifth, the elimination of double taxation. Corporate income is taxed, and then the dividend that goes to the shareholder out of the profits is taxed again in the personal tax paid by the shareholder. Also, the personal savings of an individual is what’s left over after income tax has been paid. If that savings is then invested, then the capital gain on that investment is taxed again. Likewise, an estate accumulated after tax has been paid on it is then taxed again in the estate tax. The savings and investment of our citizens should only be taxed once.
The Tax Cuts and Jobs Act (TCJA) was a dramatic step forward to change tax policy to emphasize growth. However, many of the provisions of the tax cut act fail to achieve what is necessary for the economy to achieve its full potential.
We at FCF/AO say there is much more to be done. The next step is “Tax Reform 2”. We propose eight changes and reforms to the TCAJ to achieve the growth objectives that will benefit all Americans. The eight changes we propose for the Tax Cuts and Jobs Act (TCJA), are in line with the analysis done by the Tax Foundation. We at FCF/AO adopt most of the changes recommended by that foundation. Four proposals affect the taxes imposed on individuals, and four affect business activity in the U.S.
FCF/AO assigns paramount importance to the business reforms. The policy position of our organization is that increased commercial activity means more jobs, higher wages, and better careers for everyone. This empowers our citizens, especially younger workers entering a more robust marketplace. As such, we begin with the business proposals.
First, The TCJA makes investments in equipment 100% deductible immediately, not gradually over time in an amortization schedule. This reform in the TCJA encourages, almost commands, new investment. This directly creates jobs and productivity of employees. 100% immediate deductibility is one of the core proposals in our “Growth Code”. The problem in the TCJA is that the 100% expensing expires after 2022. Businesspeople will recognize that further business investment will be discouraged after 2022, which influences their business investment decisions now. We propose to make permanent the 100% ability to deduct investment.
Second, today interest paid on business debt is deductible up to 30% of net revenue of the business. This encourages taking loans to expand a business, which means more equipment can be bought, and more workers can be hired. After 2021, the 30% will be based upon a lower calculation. This discourages taking large business loans. This discourages taking risks to grow businesses. We recommend that the more generous way of setting the revenue standard, that is the practice today, be made permanent.
Third, the TCJA makes business profits “passed through” to a taxpayer’s 1040 subject to a lower tax rate than regular wages and salaries. This is a giant encouragement to individual entrepreneurship. This favorable treatment expires after 2025, and we recommend that it be made permanent. This is a step in the right direction towards the “Growth Code”, which if fully implemented, would allow for a 15% tax on business revenue, whether corporate profits or “pass through” profits from the small business activity.
Fourth, under current tax law, money spent on research and experimentation by businesses is 100% deductible as a business expense. This encourages research and experimentation. If research results in more efficiency, the business can then expand and hire more workers. Under TCJA, such expenditures would have to be deducted over 5 years starting in 2021, increasing the cost of research and experimentation. We recommend that the tax law continue to allow 100% deductibility of money spent for research and experimentation.
The above four recommendations of “Tax Reform 2”, are the hard part. Many politicians in America today resist any reform that helps businesses in the free market. We at FCF/AO know that more robust business activity means more people employed and higher wages. But often actions that help businesses seem distant to regular people, who are also taxpayers and voters but don’t run their own businesses.
TCJA contains many reforms that help taxpayers directly. In fact, we can expect multiple members of Congress to pursue making permanent breaks for individual taxpayers. Already, Representative Rodney Davis, IL-13 has offered the “Permanent Tax cuts for Americans Act”. Likewise, Senator Ted Cruz has filed a bill to make the individual tax cuts permanent.
Making the tax cuts for individual taxpayers are very good because it helps people in their daily lives. Also, it gives them more money to spend, increasing demand in the economy. Often the individual tax cuts are justified as a matter of simple morality. As such we support the following additional four changes in the TCJA for personal income:
The fifth of our proposals, we support making the new personal income tax brackets permanent. They are set to expire in 2025. Our original “Growth Code” calls for three brackets of 10%, 15%, and 25% for all taxpayers, with a cushion for the lowest wage earners. The TCJA has seven brackets, just like today, but the rates are lower. Making the new rates permanent is a step in the right direction of the “Growth Code”.
Sixth, The TCJA eliminates the personal exemption but raises the standard deduction and child credits. This reform expires in 2025. We recommend that the reform is made permanent. The expiration of the reform increases taxes on the low wage earners. Our “Growth Code”. Calls for a $4,300 standard deduction for low wage earners otherwise subject to the tax in the lower bracket. This TCJA reform is a step in the right direction.
Seventh, the TCJA changes the law to limit state and local tax deductions and limits the deduction on higher loans for home mortgages. We can’t see why we would want to discourage people from buying larger homes, and to discourage builders from building larger homes. That portion of the TCJA should be stopped right away. We concur with limiting the full-unlimited deduction for high tax states. Full deduction in high tax states means the tax is being subsidized by taxpayers in low tax states. There is no reason to encourage states to increase local and state taxes at the expense of federal taxpayers in low tax states.
Eighth, the TCJA increases the threshold for the estate tax to be charged from $5.9 million to $11.2 million. The estate tax is 40% above the threshold. That savings or the value of a business or family farm is often over $5.9 million, and the taxes prevent the estate from being passed down to the son or daughter. The earnings of a person leaving the estate have already been taxed once; the estate is made up of “after-tax” dollars. This is a double taxation. It is immoral, and our “Growth Code” calls for the elimination of double taxation, including the estate tax. Let entrepreneurs who undertook risk their entire lives to build an estate, and paid taxes on it, keep the remainder of their own money and bequeath it who they choose. The federal government should keep their hands off the work of a lifetime.
The original FCF/AO “Growth Code” is intended to build up the American economy, increase business activity, increase jobs and wages, and add to the quality of life of every American. The TCJA is a major step in that direction but needs amendments to get the reform closer to the “Growth Code”.
During the “Great Recession” American growth slowed dramatically. American policy must be to retain the historic growth rate of 3.2% and then to grow above that rate. These proposals we are adopting here have the promise of releasing the American economy to reach its full potential We recommend these changes to the TCJA to all our readers and followers.
Read the original Growth Code here.