Today in a speech at Morris & Associates in Garner, N.C., 2016 Republican presidential candidate Jeb Bush laid out his campaign’s plan for comprehensive tax reform. Unlike many traditional Republican tax plans — including those proposed by many of his rivals for the GOP nomination — Bush’s plan focuses on alleviating the current economic maladies of anemic GDP growth, stagnant middle-income wages, and rising income inequality.
The former Florida governor’s unorthodox approach starts with slashing the corporate tax rate to keep the U.S. an attractive place for corporations to do business, create jobs, and pay taxes. His plan would drastically cut the U.S. corporate-tax rate from 35 percent to 20 percent, a much-needed reform that would keep the U.S. a competitive place to do business.
The U.S. currently has the highest corporate-tax rate among OECD countries, which in an increasingly globalized economy reduces the incentive for multinational companies to invest on our shores and makes it difficult to attract profit repatriation from abroad, at the cost of significant federal tax revenues.
Cuts to the corporate-tax rate are significantly different from the cuts to capital-gains taxes that George W. Bush favored and his brother’s plan deemphasizes. (Jeb Bush’s tax plan would not lower the current 20 percent capital-gains tax rate, apart from removing the 3.8 percent surcharge imposed by Obamacare.) Capital-gains rate cuts disproportionately benefit the wealthy, while lower corporate rates can translate directly into higher pay for employees and more investment from firms in the real economy.
Bush’s plan focuses on alleviating the current economic maladies of anemic GDP growth, stagnant middle-income wages, and rising income inequality.
One result of America’s high corporate tax rates is the loss of government tax revenue from corporate-tax inversions (corporations relocating outside the U.S. through acquisition by smaller foreign companies). The number of companies reincorporating abroad through inversions has surged dramatically over the past year, leading the U.S. Treasury Department to impose new rules in late 2014 designed to discourage the practice. These new rules don’t seem to have stemmed inversions: Just this year, several U.S. pharmaceutical companies have continued following the trend, moving to lower-tax jurisdictions through corporate takeovers.
Jeb Bush’s plan would be a big step toward fixing what the Treasury Department can’t and promoting investment on American soil. It moves U.S. corporations from worldwide taxation to territorial taxation. In essence, this means such corporations would only pay taxes on their domestic income, which would further encourage them to keep jobs and pay taxes within the U.S.
Jeb Bush’s tax plan would also encourage real, long-term investment over excessive debt-financing and accounting manipulation by fundamentally changing how we tax business income. It would remove the tax deduction for interest payments (which discourages excessive leverage) and exempt companies from paying taxes on major capital expenditures in the real economy, such as buying property and equipment.
#share#One could argue that Bush’s proposal to discourage borrowing draws a stark contrast to many of the economic policies of his brother’s administration, which encouraged the household and corporate debt that some see as a key contributing factor to the 2008 global financial crisis.
It is also a much more sensible approach to encouraging investment in the real economy than the one favored by 2016 Democratic presidential front-runner Hillary Clinton, whose tax plan would raise short-term capital-gains rates. Clinton’s proposals could potentially discourage individuals who provide short-term financing in the form of equity to emerging technology companies like Uber or Facebook, which offer investors the potential for high short-term returns.
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Instead of attacking short-term capital gains, which could create several distortions in financial markets and investment in the real economy, Jeb Bush’s plan, limited as it is to a direct tax on cash flow, would reward companies making long-term investments.
Taking aim at stagnant wages among the nation’s poorest and rising income inequality, Bush’s plan would also expand the Earned Income Tax Credit (EITC) for single Americans. The EITC offers significant relief to the working poor, offsetting federal payroll and income taxes through a payment to any low-income worker who files a tax return. Several economic studies have also shown that the EITC expands the size of the overall labor supply by providing an incentive for individuals to re-enter the workforce. With labor force participation in the U.S. hovering around an all-time low of 62 percent, expanding the EITC to single individuals could very well act as both a poverty alleviator and a way to jump-start economic activity.
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#related#With real GDP growth continuing to hover around an anemic rate of 2.2 percent, Bush’s stated goal of 4 percent GDP growth is an ambitious one. It has been criticized in some corners as being unrealistic. But several free-market policy initiatives from recent history have coincided with GDP growth near 4 percent. Ronald Reagan cut taxes and instituted regulatory reforms, and the result was 3.5 percent GDP growth during his presidency. Bill Clinton’s agenda combined free trade, tax reductions on capital, and budget restraint, and his administration saw 3.8 percent real GDP growth.
By combining serious corporate-tax reform with tax credits for the working poor, Jeb Bush’s plan could be just what’s needed to help lower and middle-income families improve their take-home pay and employment opportunities — and to help nurse the American economy back to health.
— Jon Hartley is an economics contributor for Forbes and is a co-founder of Real Time Macroeconomics LLC, a financial-technology firm. He has informally provided economic policy advice to the Jeb Bush campaign.
Editor’s Note: This article has been updated since its initial posting.