7 Highlights From Marco Rubio’s Tax Plan

$2.1 trillion in corporate earnings remain overseas—that’s $2.1 trillion in untaxed revenue belonging to U.S. companies. With the corporate tax rate at 35%, should we expect U.S. corporations to “repatriate” that income? Certainly their shareholders would prefer that those earnings remain overseas. Furthermore, the current system gives preferential treatment to some industries, penalizes others, and often taxes income twice. The aggregate problem is simple: many people—politicians and business owners alike—believe the U.S. corporate tax code hinders economic growth within our borders.

Most experts agree on the necessity of tax reform, but as presidential primaries ramp up, the public is being inundated with multiple, conflicting, and often confusing tax plans. Let’s clear the air—here are seven highlights from Marco Rubio’s business tax plan, as gathered from his senatorial website.

1. “Our plan will eliminate double taxation.”
C corporations are certainly not within the current tax code’s good graces. A company is first taxed at the 35% corporate rate, and then state taxes are added in. When all is accounted for, the effective tax rate for many companies rests close to 40%. It doesn’t stop there—when shareholders realize profits and receive dividends, those earnings or capital gains are taxed again. It’s no wonder that “pass through” businesses and S Corporations have been on a steady rise for the past 30 years.

Rubio would like to lower the corporate tax rate to 25%, then eliminate further taxation on shareholders when they are paid through dividends.

2. “Establish parity between pass-through entities and c-corporations.”
Rubio’s plan includes a 25% tax on S Corp entities and “pass through” models as well, as opposed to the current rates which can reach 39%. The 25% rate would be imposed on the individual’s tax return. Since some individuals would be tempted to falsely classify personal income as business income (because of the new lower business rates), Rubio plans to carefully enforce correct classification.

3. “We will also allow for full expensing of capital purchases.”
Rather than relying on the current system of depreciation tables (which are often subjective), Rubio would like to allow companies to immediately deduct expenses in their entirety, thus receiving tax benefits. Furthermore, “In the years after the expenditure is made, there are no allowances for economic depreciation of the capital investment.”

4. “The Internal Revenue Code includes an abundance of carve-out tax provisions that create advantages for special interests and distort the free market.”
Theoretically, once Rubio’s plan for full expensing of capital investment is instigated, there will no longer be any need for the myriad special interests in the U.S. tax code. Rubio wants to level the playing field and allow each industry to compete on equal footing.

5. “In general, this plan eliminates the deductibility of new debt.”
Rubio’s plan would attack debt from two angles: first, new debt would no longer be deductible. Secondly, income earned through income would not be taxable. In short, Rubio would like to discourage what he refers to as “pro-debt bias” through his tax system rather than making debt attractive to businesses.

6. “…It is necessary to transition away from the current U.S. worldwide tax system.”
With corporate tax evasion enjoying some national facetime, Rubio would like to see the U.S. move towards a “territorial” tax system in which American corporations only pay taxes on money earned within U.S. borders. Currently, businesses pay taxes abroad and in the U.S. on foreign earnings (if they choose to bring money back to the U.S.). Rubio claims that he would also create strategies to combat devious profit shifting and other similar tax evasion strategies.

Beyond those proposals, he would like to offer a 6% repatriation tax in an effort to bring American corporate earnings back to the U.S.

7. “Banks and other financial institutions present a special case for our tax reform proposal.”
Since Rubio’s plan will try to eliminate interest from the tax base, banks wouldn’t be properly represented without special considerations. Under this plan, banks would be exempted from new interest rate rules while paying the new 25% business tax.

This list of highlights, while thorough, is not comprehensive. You can visit Rubio’s website for a deeper explanation of his tax proposals, the Tax Policy Center offers a helpful white paper on the crucial differences between “pass through businesses” and traditional corporations.

Further reading:
1. http://www.rubio.senate.gov/public/index.cfm/files/serve/?File_id=2d839ff1-f995-427a-86e9-267365609942
2. http://www.nytimes.com/2016/02/17/upshot/rubio-tax-cut-got-bigger-and-bigger.html?_r=1
3. http://www.taxpolicycenter.org/publications/url.cfm?ID=2000606
4. http://money.cnn.com/2016/02/11/pf/taxes/marco-rubio-tax-plan/
5. http://taxfoundation.org/article/overview-pass-through-businesses-united-states