Increasing economic growth depends on tax reform

The American electorate is beyond ready for Washington officials to enact policies that will spur greater economic growth and modernize a convoluted tax code last revamped in 1986. Changing the code to put the U.S. on equal footing with global competitors by reducing the corporate tax rate from 35 percent is the best and most immediate way to do so.

An overhaul would also help in bringing overseas money back home, generating lasting certainty and creating parity among all sectors of the economy – energy, telecommunications, manufacturing and yes, the transportation sector I represent.

As Congressman Kevin Brady of Texas, the lead tax writer in the U.S. House of Representatives, has said, the current code is no longer defensible. But neither is inaction, which is why a large contingent of the business community is increasingly united on this front — willing to put all tax expenditures on the table — and why U.S. industry is making the sale to the American public.

{mosads}The U.S. Chamber of Commerce CEO Tom Donohue is spot on when he says “failure is not an option.” The pitch begins in earnest now with congressional leaders releasing greater details this week.

While the U.S. economy continues to show signs of progress — the U.S. economy grew three percent in the second quarter, the fastest in two years — we are still not close enough to sustained growth at three to four percent. This means that we still have not moved beyond stabilizing unemployment and returning incomes to pre-recession levels, a nearly $9,000 gap according to the Joint Economic Committee.

For capital-intensive industries like the freight rail sector — tethered to the economy and consumer behavior — slow growth at the hands of a punitive tax code means less means and incentive to invest.

“The corporate tax rate is, in effect, a tax on corporate investment; a high corporate tax rate discourages investment, whereas a low corporate tax rate encourages investment,” according to the Tax Foundation.

As the co-chairs of Reforming America’s Taxes Equitably (RATE) Coalition recently pointed out, a 15 percent rate in Ireland correlates with a 7.2 percent growth rate, while 19 percent in the United Kingdom generates growth doubling the U.S.

“[If the corporate rate was globally competitive], one report estimates U.S. businesses would have instead experienced a net gain of $600 billion in assets over the same period,”argues the aptly named Americans for Tax Reform.

Meanwhile, a study commissioned by the National Association of Manufacturers shows that a tax overhaul similar to proposals under consideration today in Washington, over a 10 year period, could increase GDP by more than $12 trillion relative to Congressional Budget Office (CBO) projections, boost U.S. investment by 1.5 percent, or $3.3 trillion, and add between 492,000 and 522,000 jobs per year. This has the potential to raise wages and the economic outlook of U.S. workers and families – a goal that should be highlighted as paramount.

Next, tax reform can combat a phenomenon consistently noted by Speaker of the House Paul Ryan. “Companies are fleeing this country and taking their good jobs with them.” According to Moody’s, increased offshoring of cash by major tech companies last year brought the total sum of corporate dollars out of this country to an all-time high. Moody’s says 70 percent, or $1.3 trillion, is now parked overseas.

A competitive U.S. tax code rewards companies to bring this money home and dedicate greater resources to research and development, innovation, infrastructure and equipment and workers. It also helps reestablish and broaden a necessary tax base. And taxed earnings can of course also be used to fund critical government programs and reduce debt.

Last, a simpler code and a lower rate might lead to some industries, including the freight rail industry, losing certain positives. But the broader implications – namely increased domestic growth – outweigh those existing tax provisions. “If the code were to be scrubbed of all corporate credits and deductions not related to cost recovery, it would raise $704 billion over 10 years,” according to the National Taxpayers Union.

Action must begin now.

Edward Hamberger is president and CEO of the Association of American Railroads.