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Wyden: Outdated Tax Code Harmfully Distorting Investment Decisions
CBO Report on Capital Investment Reflects Need for a More Fair and Efficient Tax Code
WASHINGTON –Senate Finance Committee Chairman Ron Wyden, D-Ore., today said tax reform must end the antiquated and distorted tax treatment of various capital investments across the economy following the release of a CBO report outlining the scope of the issue.
“The American tax code hasn’t had a thoughtful makeover since the days of Pac-Man and VHS. That has an especially harmful impact on investment decisions, which today are swayed by tax advantage as much as what’s a good investment that will grow the economy and create jobs.” Wyden said. “Today’s report from CBO illustrates just how dramatic these distortions truly are. Any effort to reform the tax code in the next Congress absolutely must stop senselessly picking winners and losers. I look forward to tackling this issue in the new year.”
The report, requested by the Finance Committee last year, lays out the distortions in tax treatment of capital investments based on the source of financing, the industry and whether or not the investor is structured as a corporation.
The rules governing taxation of investments have not been updated since 1986 and do not reflect the structure of the U.S. economy, new technologies or even whole new industries. For example, the effective tax rate on investments in computers and software is nearly 40%, while the rate on railroad track and mining structures is about 15%. The tax code should not encourage investment in certain industries or products over others, which slows down economic growth.
The report finds that the tax code disproportionately favors debt-financing over other sources, like equity. Accumulating more and more corporate debt drags on economic growth and could one day lead to another financial crisis.
While the report also provides discussion on several options to reduce the disparity between the tax treatment of various investments, it does not address the associated revenue, progressivity, or other policy impacts. As CBO highlighted in the previous version of this report, proposals to lower the tax rate on capital could reduce federal revenues, distort labor markets, increase taxes on some taxpayers, and undermine certain preferred investments in the current tax code.
The full report can be found here.
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