The North Star Of Tax Reform

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Americans should strongly support the tax reform bill passed by the House of Representatives (and now headed to the Senate). The final legislation to which both chambers agree will change, but the great majority of individuals, families and businesses will see lower tax bills because of the legislation. Most will see their tax-filing processes simplified. Make no mistake, however, the real “vig” in this legislation is in its effects on U.S. economic growth — which benefits everyone.

For far too long, we have been critical of the demonstrably self-destructive aspects of our corporate tax code. The United States has a corporate tax rate that is among the world’s highest. We also have policies that actually incentivize U.S. companies earning money from offshore markets to keep that money offshore instead of bringing it back into the U.S. (almost $3 trillion at last count). Add to that, among other things, policies that distort basic business investment decisions — decisions that translate directly into jobs and wages — and the problem is even more acute. According to the Business Roundtable, among companies listed in the Global Fortune 500, the number of U.S.-headquartered companies declined by more than 25 percent between 2000 through 2014. This is no surprise – we have known about it for years – but it should be worrisome for all of us, and the proposed tax reform bill will take steps to address this issue.

The proposed bills are not perfect, as 300+ million Americans will never agree on what is “perfect” in any new law which affects their finances. Still, the status quo is utterly unsustainable, and this legislation — here and now — represents the best opportunity for changing course. We should pass the bill not for our own selfish interests, but in the interests of our country’s future — the future our children and grandchildren will inherit. As a friend recently reminded suggested: “Let’s keep our eye on the North Star.”

Most Americans will see a tax reduction and simplification from this bill. A median-income family will see nearly $1,200-$1,500 a year in savings from the House and Senate plans. That alone should be enough to pass a bill. But factor in the economic benefits and the case is even stronger. The Council of Economic Advisers estimates that the economic growth aspects of tax reform will add at least $4,000 of additional income to the average household. There are groups which will object to the bill for myriad reasons. However, if most of them will keep the North Star in view, their objections will become secondary.

For example, most high-income Americans will pay the same, or perhaps even higher, taxes under this legislation. But if the growth prospects for this bill materialize, as many reputable economists believe they will, our economy will grow north of three percent, bringing more jobs, higher wages and a more robust stock market. A no-change, or even a temporarily higher change, in tax liabilities for some in this group should not dim the light of the North Star.

The same goes for small businesses, which will pay lower rates and enjoy new deductions and other important money-saving provisions in both bills. Add to that the economic “vig” discussed earlier and most small business owners should be able to readily accept this new paradigm. And if they couldn’t, there is the option of converting from a pass-through (e.g., S Corp) to a C Corp and paying the 20 percent C Corp rate, albeit with a double tax on dividends. After the 1986 Tax Reform Act, businesses fled in the opposite direction, but they may very well take the C Corp route now.

Yes, there are individuals and businesses who won’t necessarily win as big as they had hoped under tax reform. At the same time, virtually all individuals, families and businesses will benefit in some way. As John F. Kennedy famously said, “a rising tide lifts all boats.” Or, as a less famous friend recently advised, “let’s keep our eye on the North Star.”

Michael D. Fryt is a Member of the Board of Directors for National Taxpayers Union (ntu.org), a nonpartisan citizen group founded in 1969 to work for less burdensome taxes, limited government, and economic liberty. Mr. Fryt is a retired Corporate Vice President of Tax for FedEx. Pete Sepp is President of NTU.