With tax reform heating up, House Ways and Means member Rep. Devin Nunes (R-CA) has gotten the ball rolling with a business tax reform plan called the American Business Competitiveness Act. The draft would dramatically overhaul and simplify the corporate tax code, broadening the tax base in many areas while lowering tax rates on businesses.
Nunes's draft would change business taxation to be a cash-flow tax, making it more closely related to businesses' actual inflows and outflows. Nunes has said that the plan would be deficit-neutral over ten years using conventional scoring, although he has not made the estimate publicly available. The main elements of the plan include:
- Reducing the top tax rate to 25 percent for both corporate and non-corporate businesses, phased in over ten years
- Allowing businesses to write off the full cost of investments immediately (known as expensing) rather than writing them off over the life of the investment (see here for background on depreciation rules)
- Repealing deductions for interest expenses while reducing taxes on interest income to the dividend rate (20 percent)
- Eliminating other business deductions and credits
- Changing the international tax system to a territorial system, where U.S. companies' income earned outside the country is not taxed by the federal government
- Repealing the corporate Alternative Minimum Tax (AMT)
One of the most unique aspects of the proposal is the move to full expensing and the repeal of interest deductions. Whereas proposals put forward by former Ways & Means Chairman Dave Camp (R-MI), former Finance Committee Chairman Max Baucus (D-MT), President Obama, and others all lengthen depreciation schedules to better approximate economic depreciation, this proposal would allow business to write off all their expenses in the first year, regardless of how long they would remain in service. As a recent CBO report shows, this could substantially increase business investment and thus promote faster economic growth, though by itself, it could be quite expensive and could have unintended consequences in terms of the types of investment in encourages.
Along with the move to full expensing, the proposal eliminates the deductibility of interest on borrowing expenses, which should be done along with full expensing to remove an incentive to overleverage with debt.
One potential concern with the plan is that even if it is revenue-neutral in the first ten years, it may not be after that. The phase-in of the rate cut means that the gross costs would be much higher in the second ten years than the first ten; in addition, the transition tax on earnings held overseas would only bring in revenue in the near term. Thus, revenue-neutrality may be turn into revenue-losing over the longer term.
To be fair, some elements of the plan would raise more money over the long term, particularly since expensing costs more upfront than it does over the long term. It is difficult to know the full long-term effect without seeing the Joint Committee on Taxation estimate or having them weigh in on the long-term revenue effect. If the plan falls short, it could be changed to reduce rates less or include further base-broadening by considering other tax provisions that the plan does not affect. Making the plan revenue-neutral over the long-term would likely lead to higher revenue in the first several years, which could be used to phase in the rate reduction faster, to pay for investments, or preferably, to reduce the medium-term debt.
Budget estimates aside, the Nunes draft is a serious contribution to the tax reform debate, joining frameworks and plans from other policymakers such as President Obama and former Ways and Means Chairman Dave Camp (R-MI) The leading tax reform players should carefully consider the proposal and the pros and cons of going this route. Be sure to check out our paper on corporate tax reform for a comparison of other major plans, and create your own with our tax reform calculator.