The United States Congress passed the Tax Cuts and Jobs Act this week, a package of tax reforms that will overhaul the U.S. tax code for individuals and corporations. Not since 1986 has our tax code undergone such a comprehensive renovation. Consider that in 1986, laptops weighed dozens of pounds, Sergey Brin and Larry Page were still a decade away from launching Google, Mark Zuckerberg was a toddler, and a young Democratic Senator from Tennessee named Al Gore introduced a bill to require the Office of Science and Technology to explore improvements to communications networks for supercomputers. In the IT world, 1986 was the stone age. And that’s why we’re thrilled with this week’s news.
We’ve long advocated for reforms to our tax code to ensure our own IT industry remains globally competitive. The current code is littered with inequities that force our IT industry to compete on an uneven playing field. Our corporate rates are among the highest in the world, companies are penalized for reinvesting profits they earned abroad back into the United States, and entrepreneurs have to navigate confusing depreciation laws, to name just a few items that hamstring our innovators and job creators. In a marketplace in which 95% of the world’s consumers live somewhere other than the United States, our outdated tax code does more to inhibit innovation and growth than foster it.
But this is all set to change on January 1, 2018, when much of the new law goes into effect. The Tax Cuts and Jobs Act would:
- Cut the corporate tax rate to 21%. U.S. companies have been burdened with the highest corporate tax rate among developed countries, making them less competitive with their foreign counterparts. Whereas the international average corporate tax rate has declined consistently since 2003, the U.S. has not followed suit. The new corporate rate will mean businesses can invest more in their products and people, and send less to Uncle Sam.
- Move to a territorial system. The U.S. is one of a handful of developed countries that taxes corporate earnings on a global basis. This means that a U.S. company’s foreign earnings are subject to U.S. tax when repatriated, increasing the foreign tax rate on these earnings to the U.S. rate. A territorial system removes the punitive tax that prevents foreign earnings from being repatriated to the U.S. Under this new framework, firms will be incentivized to innovate and invest domestically regardless of where the firm’s profits are located.
- Enact a deemed repatriation of 15.5% on liquid assets, and 8% for illiquid assets. Currently, companies are discouraged from repatriating their profits because of the high corporate tax rate that would result. Encouraging the return of those profits to the U.S. at a reasonable, bifurcated rate will help stimulate domestic economic activity not possible before.
- Allow pass-through entities to deduct 20% of their income. Many small- and medium-sized businesses are structured as pass-through entities. The income from these entities is reported as the income of the investor or owner. The new deduction will enable these owners or investors to deduct 20% of their first $315,000 of joint income before filing their taxes. This provision expires after 2025.
- Preserve the R&D tax credit. Made permanent in 2015, the research and development tax credit incentivizes experimentation and innovation. It increases the aggregate amount of knowledge in the U.S., growing the economy, wages, and our standard of living.
- Allow five years of full expensing. Too often businesses are forced to slowly write of the cost of equipment. By permitting full and immediate expensing for five years, businesses will be able to focus on bringing new products and services to market faster. This provision begins to phase out after five years.
The United States IT industry has long been the envy of the world. The enactment of the Tax Cuts and Jobs Act helps to ensure that this remains the case for the foreseeable future. The new law will stimulate innovation, along with job and economic growth. IT jobs are the backbone of the American economy, and we are happy to see policymakers in Washington work hard to level the playing field for these critical occupations. We stand ready to work with policymakers on other issues important to the IT industry.
Read our statement on the Tax Cuts and Jobs Act here.