Pathway to an economic ‘melt-up’

“Business investment across the U.S. is fizzling out.”

That is the first line of a recent Wall Street Journal report that notes a range of gloomy data on business spending, including a 2.2 percent increase in business investment for the third quarter of 2015 — one of the weakest results of the past six years — as well as a 3.8 percent drop in capital expenditures for the January-October period. And there aren’t many indications that the mood will brighten; in fact, for the third straight quarter, CEOs are saying they plan to decrease capital investment further.

{mosads}It’s no mystery why businesses are unwilling to invest — just look at the uncertainty they face over the tax and regulatory regime. Right now, business decision-makers are once again watching nervously as Congress debates the renewal of crucial tax extenders. Whether companies qualify for an array of these tax and wage credits can determine their ability to invest in new land, equipment and personnel. And even if Congress grants them their wish list now, who knows whether they’ll be so lucky the next time around?

It will be near-impossible to get the economy humming again while businesses remain reluctant to spend money to expand their production and services. Even proposals to lower business tax rates, as necessary as that is, won’t do enough to free up these funds, since companies will still have to account for the uncertainty of tax and regulatory compliance costs.

To end this problem permanently, we need more than mere rate adjustments and tax credit renewals; we need a systemic change in the way businesses are taxed. That’s where Rep. Devin Nunes’s (R-Calif.) tax reform proposal comes into play.

Nunes’s American Business Competitiveness Act, which will be introduced in Congress within the next few weeks, will radically restructure and simplify the business tax code. There are four main features in Nunes’s plan:

• 100 percent expensing for all business investment.
• Business cash flow will be taxed at a top rate of 25 percent.
• Elimination of all special deductions and credits.
• Switch to a territorial tax system.

These simple steps may not seem revolutionary, but their economic effects would be hard to exaggerate. By implementing 100 percent expensing, a vast array of investment disincentives would be abolished — and even better, companies would be given a major tax incentive to plow their money back into their businesses. The resulting wave of business expansion would create dramatic economic growth; the Tax Foundation estimates that the plan would boost investment levels by 22 percent, raise wages by 6 percent, create 1.4 million full-time equivalent jobs and increase GDP by 7.3 percent. Nunes refers to these effects as an “economic melt-up.”

Furthermore, by moving to a territorial system, the bill would eliminate tax impediments that give many U.S. companies the incentive to keep earnings from foreign subsidiaries parked overseas. The positive effects of this money flowing into the United States would ripple through the whole economy.

Finally, the reform would make it much easier to start and run a small business. People wanting to invest in a start-up could immediately write off their entire investment, while small business owners would be relieved of burdensome regulations. Complicated depreciation schedules, like the accelerated depreciation provisions that Congress is now considering with the tax extender package, would disappear. And with a simpler and more transparent system devoid of special deals, it would be more difficult for Congress to manipulate the tax code in favor of big corporations.

Nunes’s reform plan would be game-changer for the U.S. economy. It would be a vote of confidence in American business, opening up enormous opportunities at a time when businesses are reluctant to invest in themselves. Although not many Americans have witnessed an “economic melt-up,” the American Business Competitiveness Act may actually create one — at just the right time.

Carter was a deputy assistant secretary of the Treasury under President George W. Bush and served on the staff of the Senate Budget Committee. Davis is a former U.S. representative from Kentucky and served on the House Ways and Means Committee.