Background: American businesses are the backbone of our economy. They create jobs, provide goods and services that raise the standard of living, and offer economic opportunity for millions. Unfortunately, our current tax code has become a major obstacle for both creating and expanding a business for a number of reasons.
- Uncompetitive: The U.S. imposes high rates on both corporations and small businesses who file taxes through the individual income tax code. The corporate tax rate exceeds 39.1 percent when combining federal and state rates, compared to an average tax rate of 25.3 percent for the rest of the developed world. This puts U.S. corporations at a competitive disadvantage. Small businesses experience even higher tax rates than corporations. This is because 83 percent of small businesses file taxes through the individual income tax code since they organize as pass-through entities. Pass-through entities, including sole proprietorships and partnerships, experience an average top marginal income tax rate of 47.2 percent.
- Discourages Reinvestment: American businesses operate under a worldwide tax system rather than a territorial tax system. This means domestic companies are double taxed on profits they earn overseas – once by the foreign country they earn profits in and once again when they bring those profits back to the U.S. This encourages domestic companies to keep their profits out of the country preventing over $2.1 trillion in profit from being reinvested here at home.
- Double Taxation: The tax code punishes savings and investment necessary for businesses to grow and expand. Income that is saved or invested by businesses is taxed once through income taxes or corporate taxes and then receives additional taxes through the estate, gift, and/or capital gains tax. This form of double taxation discourages saving and investment essential for economic growth.
- Complexity: The U.S. tax code is over 74,000 pages long, adding high compliance cost to business operations. 6 billion hours are spent complying with the tax code every year while estimates show tax code compliance costs our economy $125 billion to $400 billion
- Cronyism: The tax code discriminates by offering various tax credits, deductions, and exemptions for some individuals and businesses over others. This is particularly true in health insurance tax policy which favors employer-sponsored insurance over insurance purchased by the self-employed.
Solution: Congress must pass comprehensive tax reform that lowers and equalizes rates for corporations and individuals, establishes a territorial corporate tax system, eliminates tax bias against saving and investment, simplifies the code, and eliminates favoritism. This kind of tax reform has the potential to grow the economy by 15 percent over the next 10 years, increasing the average family’s wages by 10 percent, or $5,000 for a family earning $50,000 a year. Passing comprehensive tax reform will allow entrepreneurs to create businesses, empower existing businesses to expand and create more jobs, and grow our economy to the benefit of all.