Next President’s Duty to Push for Global Tax Reform

Houston Chronicle | How long before U.S. Treasury officials, Senate Finance Committee staff and others who advocate tighter regulations to slow the upsurge in corporate tax shelters shift their attention from symptoms to cause? The corporate tax shelter problem could be solved completely and sensibly simply by junking the corporate income tax.

Beyond its primary goal of providing revenues to pay for government, the federal tax system should be simple to understand, easy to comply with and inexpensive to administer; it should be fair, and on the economic front it should not hinder and preferably foster jobs, growth and competitiveness. Except for its modest contribution to federal revenues (about 10 percent), the corporate income tax fails miserably in serving these objectives.

It is monstrously complex. The existence of the tax-shelter problem itself eloquently testifies to that complexity, else corporate tax lawyers and accountants would not continue to ferret out new ways to shelter income.

The time, money and talent consumed in the corporate/IRS income tax battles represent an absurd and needless economic waste.

Evaluation of the fairness of the corporate income tax by nonexperts is significantly hindered by many in the media. Print headlines often refer to “Corporate America,”—e.g, “Corporate America takes big tax hit”; or “Corporate America reaps huge profits from big tax loopholes.” These eye-catchers beg the question of just what is “Corporate America.” This leaves people with the impression that somewhere out there are huge, faceless enterprises to which their tax burdens can conveniently be shifted.

Not so. People, not companies, pay corporate taxes—as customers, workers or shareholders. Continued press pretension to the contrary helps permit this hidden, shiftable tax to exist without the critical public scrutiny it deserves.

The fairness of the corporate tax must be judged in terms of which groups of people take the final tax hit. Beginning in the early 1960s, most economists believed the primary hit was on well-to-do corporate shareholders, or “capital.” But the original analysis that supported this conclusion has since been disavowed by its creator, respected public finance scholar Arnold Harberger. Today Harberger reasonably concludes that any attempt to tax capital here more heavily than in competitor nations will cause it to seek the higher after-tax returns available abroad, thus leaving U.S. labor with the primary hit from the corporate tax. This would be less likely to happen if the U.S. corporate tax burden were moderate, but it is not; it is substantially higher than in most industrial nations (and some of the highest taxers abroad are now rushing to cut their corporate tax rates).

At 35 percent, the corporate tax rate here is about equal to the average stated rate in other industrial nations. However, our needlessly stingy and noncompetitive business depreciation rules push the real overall U.S. tax rate on new investment to a superhigh level.

Although globalization is far from complete, economies around the world are now much more “open” than “closed.” Little wonder, therefore, that a reliable 1996 survey supports Harberger; a strong preponderance of public finance economists at top universities by then believed that capital does not bear the brunt of the corporate tax. And that was 1996. With continued (though uneven) progress in globalization since then, the percentage today can be assumed to be even lower. Clearly, as globalization continues, the unfairness of the corporate tax in hitting workers rather than capital will only increase.

As bad as the complexity and unfairness of the corporate tax are, its economic impact makes it most indictable as a bad tax that should be summarily junked.

The economic case for sending the corporate income tax to the junk yard is overwhelming. The corporate income tax is anti-growth, anti-job creation, anti-incentive, anti-entrepreneurial, anti-efficiency—“anti” almost everything important in helping foster growth and prosperity in a market-based economy. Indeed, it would be difficult to design a new measure that works so strongly against achievement of our economic goals.

Moreover, any revenues lost from repeal of the tax could be charged against the surplus or easily replaced through adoption of one of the pro-growth consumption taxes designed in recent years.

The task of guiding through legislation to kill the corporate tax should land squarely on the desk of the next president; it is unlikely to be solved either as a result of a public outcry or a congressionally initiated drive. Moreover, elimination of the tax is only part of a much broader and more difficult challenge for the new administration, for tax systems in the industrial world are far from suited to the needs of the new millennium. The requirements for growth-friendly globalization call for early “harmonization” of national tax systems. There is, for example, too much temptation today for individual countries to slash corporate taxes in order to entice headquarters of multinational corporations to their own shores.

What should the new president do? Early in the transition period between election and taking office, he should take two steps:

* First, he should appoint a blue-ribbon commission on “world tax reform” to report back within a year with analysis and recommendations.

* Second, he should direct his secretary of the Treasury-designate to confer with his foreign peers as soon as possible, toward the end of laying the base for coordinated but early elimination of corporate income taxes throughout the world.

In that way, Mr. President-To-Be, you can get an early start in helping create a world tax system suited to the 21st century and, not incidentally, in creating a highly constructive economic legacy.