December 9, 2016


The House GOP's Idea for Business Taxes Could Win Bipartisan Support (Peter Coy, December 9, 2016, bLOOMBERG)

 The core idea in the GOP plan--something called a destination-based cash-flow tax--is bipartisan. A version was promoted in 2010 by a Democratic think tank, the Center for American Progress.

The clean little secret about tax policy is that it's not inherently political. Republicans and Democrats do disagree about how much revenue the tax code should raise, but that's really a difference of opinion over how big government should be. They also have different ideas about soaking the rich. But there's a surprising amount of agreement on the technical issue of how to raise any given sum of money while minimizing distortions of incentives to work and invest. Think of taxation as the engine of government; there's not a Democratic or a Republican way to fix a car with cracked pistons.

"The current system has flaws that don't make sense under any perspective," says Alan Viard, a resident scholar at the conservative-leaning American Enterprise Institute. A basic rule of taxation is that a low tax rate on a broad base of income is less distorting--i.e., more efficient--than a high tax rate on a small base. The U.S. breaks that rule. It has one of the world's highest corporate income tax rates, 35 percent, but it raises less money from it as a share of gross domestic product than the average of the 35 mostly rich countries in the Organization for Economic Cooperation and Development. U.S. businesses have found ways to avoid taxes by shifting operations or headquarters abroad or by organizing into entities that aren't subject to the corporate levy.

The U.S. is also one of the few countries that attempt to tax domestic companies on their worldwide profits. It taxes profits made overseas only when they're brought home, which induces companies to keep more than $2 trillion stashed abroad. The House GOP plan doesn't just cut the rate on the corporate income tax--which would leave the flawed structure in place--it repeals it outright. Companies would be allowed to deduct the full cost of new equipment, software, or structures in the year they were purchased, rather than bit by bit as they depreciate. Because it taxes based on receipts and outlays as they occur, economists term it a cash-flow tax. The Better Way plan ends preferential tax treatment for interest payments, an old but unwise policy that induces companies to take on debt. And it brings the U.S. in line with the rest of the world by applying the tax territorially. Imports are taxed; exports aren't. That's fair to trading partners: Imports face about the same tax treatment as domestic products. And while exports aren't taxed by the U.S., they can be--and probably are--taxed by the receiving country. (One snag: While economists judge the tax to be equitable, lawyers at the World Trade Organization may feel differently.)

A hidden beauty of the Better Way approach is that the U.S. would keep more jobs at home without racing to the bottom of corporate tax rates (chart). The tax would be immune to most strategies that minimize U.S. earnings, such as assigning patents to subsidiaries in low-tax jurisdictions.

In fact, the unavoidability of the new tax raises the question of why the House is setting its target rate for it at just 20 percent, thus losing revenue that could go toward shrinking budget deficits. "Because you eliminate all those disincentives you can afford a higher rate," says the American Enterprise Institute's Viard. "The 20 percent is really very low."

Taxing only but all consumption would provide a much broader base and not on income.
Posted by at December 9, 2016 7:31 PM