The Republican campaign for president has been a wild ride of colorful personalities so far. But what’s important — and rarely reported — is how consistent most of these candidates have been when it comes to the tax issue. Right in there defining and creating the new Republican consensus on pro-growth tax reform is former Virginia Gov. Jim Gilmore.
Mr. Gilmore has proposed a tax reform plan he has accurately coined “The Growth Code.” Under his plan, the top personal income tax rate would decline from 39.6 percent today all the way down to 25 percent, the lowest level since the 1920s. There would be only three income tax rates: 10, 15, and 25 percent.
All deductions would be eliminated except for mortgage interest and charitable contributions.
Businesses would face a uniform tax rate of 15 percent, which would immediately make our companies much more competitive across the globe. According to the Organization for Economic Cooperation and Development, the average business marginal tax rate in the developed world is just under 25 percent. Instead of jobs and capital fleeing America for lower tax environments around the globe, just the opposite would occur — jobs and capital from around the world would rush to set up shop here.
Moving to a business tax rate this low is also a backdoor way to do international tax reform. The United States is the only country in the developed world which seeks to tax the worldwide income of U.S. firms all around the globe — even that income not earned in the United States and which already faces taxation abroad. Most countries have a “territorial” system in which they only seek to tax income earned within their borders. As a result, the United States often imposes a double tax on income our companies earn overseas — even though we allow for a credit on what was already paid in the other country. By moving to a 15 percent tax rate, the foreign tax credit should bring that double taxation to zero in almost all cases, resulting in a de facto territorial tax regime bank shot.
Importantly, business investments would shift from our current system of depreciation (investments slowly deducted in pieces over many years) to a more common sense system of “full expensing” (where all business investments would be deducted in the year of the asset purchase). This not only passes the basic horse sense test — what you spend in a year you get to deduct that year — it’s also fantastic for growth.
By moving to full expensing, business investments would be on par with any other ordinary and necessary business expense. No longer would the tax code say that a wage or a pencil is immediately and fully tax deductible, but that it takes five years to deduct a computer and thirty-nine years to deduct an office building. We can expect business fixed investment — the seed corn of future potential economic growth — to be revivified under this proposal.
The Gilmore “Growth Code” plan also creates a “yield exempt” tax system for all types of savings. For families, they would save on an after-tax basis, the same way you put after-tax dollars in a bank or brokerage account today. But the return, the yield, on savings and investment would be free from taxation. This is currently the tax treatment found in products like Roth IRAs and 529 college savings plans. Mr. Gilmore would extend this simple, pro-growth, and common sense treatment of savings and investment to all forms of thrift. Effectively, this eliminates the capital gains and dividends tax on all portfolio income. It also makes savings choices far easier for the middle class, who have to deal today with a confusing hodgepodge of 401 something or others and IRAs named after ex-senators.
There is every reason to believe that this combination of tax reforms — lower marginal rates on businesses and families, full business expensing, and universal Roth-style tax treatment of savings — will result in greater economic growth, higher wages, and more jobs. Even better, this is the basic plan design that all the presidential campaigns seem to be trending toward.
Mr. Gilmore — who knows a thing or two about cutting taxes from his days in Richmond — should be saluted for both adding to and helping lead this growth revolution for our century.
• Grover Norquist is president of Americans for Tax Reform