American Dreams (5 page)

Our first challenge is to make America once again the best place in the world to invest and create jobs.

There was once a time when there were only a handful of countries you could possibly invest in with any degree of confidence. But now there are dozens of developed economies capable of and willing to host new investment. This is good news for global prosperity. But for America, it also means we have competition. Today, capital investment moves freely across borders, landing wherever it can generate the best return. Americans are in a daily contest to attract investment here, to persuade investors to start a new business or grow an existing business in our country instead of abroad. In this contest for global investment, the United States has put itself at a great disadvantage.

As hard as it may be to believe, the country that produced Ford Motor Company, IBM, Microsoft and Amazon has the highest corporate tax rate of any advanced economy in the world. Combining federal and state taxes, our corporate rate is nearly 40 percent. The global average is under 25 percent. On the basis of taxes alone—putting aside the cost of regulations and labor—it is more expensive to invest and create jobs in America than in most other developed economies in the world. If we stick with this status quo, we risk losing the next great American company before it has the chance to begin. Already every day seems to bring news that yet another company has relocated its headquarters to Canada or Ireland. Liberals question the patriotism of companies that do this to avoid high U.S. taxes, but they fail to acknowledge that this behavior, although regrettable, is perfectly rational, even necessary to survive in a global economy in which we have stacked the deck against our own companies.

This is especially true when it comes to smaller and midsize employers. After all, politically connected corporations are able to carve out loopholes in the tax code that shield them from its anticompetitive effects. General Electric is the poster child for this. While GE may not have reduced its tax burden to zero as was reported in 2012, it's safe to say it didn't pay the full 40 percent.

But what happens to the employer that can't hire a large law firm to find the loopholes? What happens to the employer that can't hire the Washington lobbyist to create the loophole? What happens is that either they open overseas or, more likely, they never open at all.

It starts with not having access to the money to open up in the first place. Over 70 percent of new businesses are launched using savings or by borrowing against assets, particularly houses.
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But the housing crisis all but choked off this source of investment funds. Therefore, making it easier for people to start new business in America begins by giving people access to more of their own money. Utah Senator Mike Lee and I have dedicated ourselves to begin to accomplish this through the development of a new, modernized tax reform plan. Our plan is broad and fundamentally both pro-growth and pro-family. I will discuss the pro-family aspects of the plan in Chapter Five. As for the plan's pro-growth emphasis, it rests on creating new investment in American jobs by lowering taxes and leveling the playing field.

Because so many small and new businesses pay their taxes on personal income tax returns, our proposal integrates both the individual and business sides of the tax code in order to put small businesses on an even footing with big corporations. It prioritizes replacing our current business tax system with a new, globally competitive model. Instead of carving out exemptions for favored industries that have lobbyists, we propose a pro-growth tax code that treats all employers equally, regardless of their business structure. Furthermore, our plan would allow American employers to be more competitive with foreign companies by lowering our tax rate on businesses.

We also propose allowing employers to immediately deduct every dollar they invest back into their business. The Treasury Department estimates this deduction would stimulate investment about four times as much as lowering the tax rate. The reason is simple. Being able to immediately expense investment would apply only to new investment, incentivizing businesses to undertake more of it.

As it stands today, when a business calculates its taxable income each year, it is allowed to deduct only its operating expenses, like wages, materials and taxes. Investment expenses, like new buildings and machines, are treated differently. Businesses generally aren't allowed to immediately deduct these expenses. Instead, they have to pay taxes on that money and then write the costs off over several years or even decades. The result is that the current system discourages employers from reinvesting their profits back into the business to grow it, because deductions years in the future are worth less than deductions today. Our plan would change that by allowing all companies to take a full and immediate tax deduction on all the income they reinvest in their business.

Take the example of a business that brings in $50,000 per month, with $20,000 in basic operating costs. The owner has to decide whether to withdraw and spend the other $30,000 or to use it for investments that would grow the business, allowing it to hire more people. Under the current system, the safe thing to do is to withdraw and spend the money.

But under our plan, the company will immediately deduct every dollar that it reinvests back into the business. By allowing immediate expensing of investments, this cash is more likely to be invested, boosting productivity and leading to increased wages and the hiring of new workers. The more a business invests, the less the federal government will get to take away.

Our current tax system also encourages companies to keep the money they make abroad, and in many cases to incorporate abroad instead of in the United States. About 15 to 20 percent of the products made in the world are made by American companies operating overseas. We would like to see these companies bring the money they have made abroad back to America. We want them to invest their profits earned abroad to create new jobs here.

But our current code has the opposite effect. Under our current tax laws, if they bring this money back to America, they pay U.S. tax (with credit for any taxes paid abroad). As a result, there is an estimated $2 trillion of American corporate profits sitting in bank accounts overseas. To put it in perspective, this is equivalent to the total annual size of the German economy.

The answer is what is called a territorial tax system, under which companies are not taxed on profits brought home from abroad. The fact that the vast majority of developed economies in the world already have a territorial tax system—including all other G8 nations—has put American companies at a major competitive disadvantage. By keeping American firms competitive in the global marketplace, a territorial tax system will lead to job creation and reverse the recent trends of stagnant wage growth.

The second challenge posed by the new economy is to preserve and strengthen America's position as the global leader in innovation.

In their fascinating book
The Second Machine Age
, MIT's Erik Brynjolfsson and Andrew McAfee envision a future in which America can turn the challenges of the new economy into opportunities for better and more prosperous lives. Brynjolfsson and McAfee argue that we are at a historical technological turning point. Improvements in digital hardware, software and networks are combining to create an economic and lifestyle shift every bit as sweeping and profound as the industrial revolution.

The possibilities are genuinely exciting. Innovations that were previously confined to episodes of
Star Trek
are being realized in rapid succession. Brynjolfsson and McAfee predict we will have autonomous—self-driving—vehicles in our lifetimes, creating millions of hours of productivity for harried soccer moms and commuters. And not only have we created a computer that can beat a human at
Jeopardy!
, that computer is now going to medical school and its diagnostic capabilities are being uploaded to the cloud for the benefit of all humanity.

These exciting predictions come with a big caveat, however: This second industrial revolution and the bigger economic “pie” it will create won't necessarily benefit everyone, unless we change the way we prepare Americans for the workforce. Brynjolfsson and McAfee correctly argue that we need to transform our education system to meet the employment needs of this new, innovation-driven economy. Progress will also depend on government getting out of the way and allowing entrepreneurs to keep inventing new ways to combine technology and human labor to create new industries and jobs.

Today innovation is being stifled by an anti-innovation tax code and by patent trolls who target innovators with actions that are nothing short of legalized extortion. Perhaps most of all, as we've discussed, innovation is being held back by a regulatory code that has become a tool for established status quo industries to shut down new and innovative competitors.

When a group representing the nation's largest financial firms asked businesspeople why America isn't producing as many start-ups as it did a decade ago, the businessmen and -women's second most frequently cited reason (after a lack of qualified workers, which I address in Chapter Four) was government regulation.

The regulations explosion is a bipartisan creation. Both parties and most presidents have done their share to balloon the federal register from 71,224 pages in 1975 to 174,545 pages in 2012.
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But the current administration has taken federal rule making to new heights. Between 2009 and 2011, the federal government cranked out 106 new regulations, each with an expected cost of at least $100 million a year.
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In 2010 alone, more such “major rules” were enacted than in any year since at least 1997. One study put the costs of regulation during the first five years of the Obama administration at an astounding $500 billion, more than the entire economic output of Sweden or Ireland.
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Regulations cost us in economic growth and job creation because they are expensive to comply with. It is especially costly for small and new businesses that cannot afford the costs of hiring lawyers to help them comply with complicated regulations. These regulations, and the new ones that keep showing up, also create uncertainty. Potential employers are afraid to grow and even start, because they can't predict what the rules will be or how much business is going to cost. And so this uncertainty keeps would-be entrepreneurs on the sidelines and existing businesses from expanding.

For this reason and more, Obamacare has been the single largest impediment to job creation in the United States for the past several years. It is the perfect storm of ever changing federal mandates, costly regulations and aggressive marketplace intrusions. It is difficult to imagine a law more perfectly designed to stifle job creation.

Not all regulations are bad, of course. Some are necessary. We want to know that the water we're drinking is clean and the car we're riding in is safe. But when regulations become too onerous, they function as a hidden tax, making everything we buy more expensive.

Think I'm exaggerating? The Small Business Administration calculated that the total cost of federal regulation in 2010 was $1.75 trillion. Compare that with the $1.09 trillion the government collected in individual and corporate income taxes that year. In other words, the hidden tax of regulation is about 61 percent higher than the taxes that are out in the open.
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One of the best ways I know to ease this burden on the American people—not to mention cut down on the crony capitalist habit of using regulations to stifle competition—is to establish a National Regulatory Budget. This would be an absolute dollar limit on what federal regulations could cost the economy in any given year. My plan would create an independent board that would be tasked with estimating the cost of all existing federal regulations. Congress would then be directed to set a ceiling on the amount each agency's regulations would be allowed to cost the economy. If a proposed regulation took the agency over its budget, it would have to find savings elsewhere by repealing old regulations. This would force federal agencies to enact only those regulations that serve an essential role. Under my plan there would be no more blank checks for regulators and the lawmakers who enable them.