Editor’s note: This column was authored by Lili Carneglia.
According to House Speaker Paul Ryan, Congress wants to “deliver real middle-class relief, create jobs here at home, and fuel unprecedented economic growth.” These sentiments are the reason Republican representatives have been pushing hard for generational tax reform for 2018.
On September 27, the preliminary framework for fixing our broken tax code was released. It included a little-discussed but massively exciting provision called “full expensing.” However, there is bitter disagreement within the GOP surrounding other parts of the tax proposal, letting this unprecedented deduction remain largely unnoticed and therefore, at risk for being cut from the policy during the final negotiations. If legislators care about building meaningful tax reform that will stimulate the economy while cracking down on corporate cronyism, this provision is essential.
Investment is a crucial, preliminary part of the production process, and the full expensing provision encourages this step. Imagine that you are considering opening a coffee shop. Before your new business becomes a dynamic part of the US economy, you have a lot of upfront costs to cover. You have to buy coffee machines, tables and chairs, hire employees and agree to pay them some sort of wage. Full expensing allows businesses to immediately deduct these types of expenses. This tax break exponentially increases incentives for businesses to expand by directly crediting actions that are necessary for future growth.
By contrast, other more hotly-debated topics such as corporate tax cuts, while certainly impactful, lack the same straightforward impact on growth. This is because corporate tax cuts don’t target new investment like full expensing, rather they cut costs off the top for businesses. Unfortunately, cutting the corporate tax rate is likely to be the primary source of debate for the duration of the reform, since this issue is more polarizing and, frankly, easier to understand, despite full expensing’s greater growth potential.
Another way to think about full expensing is as if the government bought a US economy index fund. This analogy illustrates the payoffs for all parties: increased tax revenue for the government and access to investment funds for firms. The government will see an increase in tax revenue when these investments pay off because the contribution to corporate taxes will increase as a result of business’ prosperity. This is a win for the public and private sector because all can reap the benefits of growth.
The United States has been falling behind other nations when it comes to economic growth rates over the last couple of years. This lag is the sort of problem President Trump campaigned on fixing. Full expensing could help Trump make good on this promise and spur the growth the US needs to continue competing with expanding nations in an international economy.
The full expensing approach also makes massive strides in cutting down on corporate cronyism by helping to eliminate tax preference. Our current 35 percent corporate tax rate is full of carve-outs that provide preferential treatment to corporations armed with lobbyists. These businesses will continue to waste valuable resources that would otherwise be used in production as tax reform picks up steam, in addition to the $1.68 billion already spent on lobbying this year. Meanwhile, smaller businesses who cannot afford armies of lawyers to support their special interests get left behind.
Unlike complicated corporate tax deductions, the benefits of full expensing are non-discriminatory and grant all businesses helping to grow the US economy an equal break. Because this approach evens the playing field, it creates a chance for further economic growth if corporations can substitute away from investing in lobbying efforts, and instead on innovating to capitalize on the full expensing provision. These are the kind of incentives we want in place for the producers in our economy so the value of innovation and growth can spread, reaching consumers rather than being captured by a handful of well-connected firms.
Unfortunately, what seems like a no-brainer might be cut in the final compromises of this reform. Specifically, when it comes to negotiating the GOP’s push for a deeper corporate tax cut. Some politicians advocate for moving the corporate rate under 20 percent, requiring other sacrifices to raise revenue and offset the major cut. Cutting corporate taxes so US companies can compete in the international economy is a good idea. Bigger corporate rate cuts will impact more than just big businesses, lifting the economy as a whole. However, pushing for a deeper break should not come at the expense of the full expensing provision, especially when comparing the long term growth potential of each policy.
If Republicans are serious about their fast-paced tax reform timeline, they should focus on keeping the policies that can capture the most bipartisan support. Emphasizing full expensing’s potential to maximize long-term growth while slashing corporate tax preference would help boost its popularity.
Lili Carneglia holds an M.A. in Economics from the University of Alabama. She is a Young Voices advocate.
This post originally appeared on Townhall