Financial Times | November 2, 2017
America’s economy is changing rapidly. As we grow, with gig workers, start-ups, and striving unicorns working alongside and challenging traditional businesses, we need a dynamic tax code that promotes the competition, risk-taking and innovation that is the foundation of the 21st-century economy.
Republicans in the House of Representatives believe — and the economic models agree — that the reform plan we are working on with Donald Trump will streamline the tax code and grow our economy. Lowering the corporate rate to 20 per cent could even add $4,000 or more to the average American’s paycheck each year through faster economic growth, according to the White House Council of Economic Advisers.
While these macro effects are good news, we should not miss how much the plan will improve innovation and entrepreneurship — key drivers of economic growth. There are two parts of this reform that will put Americans and their ideas on top in the 21st-century economy: permanent credits toward investments in research and development; and making it easier for rank-and-file employees to own a piece of the company where they work.
The R&D tax credit originated during the Reagan tax reform renaissance. To increase private investment in research, this credit allows a company to redirect money from federal taxes to fund up to 20 per cent of its R&D spending. This research is at the core of taking ideas — big and small — and turning them into innovative products. Whether it helps cure diseases or advance technology, incentivising private research through a permanent R&D tax credit will cement the US as the innovation superpower.
Even as established companies make new discoveries, our tax code should never impede new companies from rising to the top and improving our lives. New, private companies have potential to make advances that benefit their business and society as a whole. Top talent is essential as these companies take a transformative idea from a prototype to a product. Working at, and also owning a part of, a promising start-up offers employees a greater stake in a project they truly believe in. But today, the tax code puts start-ups at a disadvantage when attracting top talent by limiting employee ownership.
Employees of private companies, especially in the technology sector, are frequently offered stock options in lieu of immediate pay. When the stock vests, or when employees choose to exercise the options, they are often met with an immediate tax bill on the gains, even if they cannot yet sell some of their stock to cover the costs. A median-income employee is unlikely to be able to afford the taxes on stock gains from a growing company, so they walk away from being equity owners for fear of the taxman.
This hurts more than job-seeking engineers and human resource officers. Less attractive private work options concentrate labour at established businesses and away from upstarts challenging the status quo, all while depriving employees of a chance to own a piece of the company they work for.
As part of the tax-reform plan, House Republicans are advocating a simple solution. We will defer the tax on private stock gains until employees can actually realise those gains by selling the stock, or at least give them a reasonable amount of time to pay the tax bill.
This will allow companies to hire and retain the best employees possible by giving them the opportunity to be owners as well. In the end, that means more innovation, more competition, more start-ups and more jobs.
We stay on top when Americans invent and build the services and products of the present and the future. Creating a dynamic tax code by ensuring a permanent R&D tax credit and placing start-ups on a competitive footing when attracting the best employees puts the US in the best position to innovate and lead in the 21st century.