Trump’s tax­ing prob­lems

Repub­li­cans face a quandary in en­act­ing tax cuts with­out rais­ing bud­get deficits

The Washington Times Daily - - OPINION - By Peter Morici Peter Morici is an econ­o­mist and busi­ness pro­fes­sor at the Univer­sity of Mary­land, and a na­tional colum­nist.

Don­ald Trump won the pres­i­dency in sig­nif­i­cant mea­sure on a prom­ise to de­liver more ro­bust growth and bet­ter jobs. As things stand, his ef­forts and GOP prospects for the midterm elec­tions will im­por­tantly hinge on ac­com­plish­ing tax re­forms that en­cour­age more in­vest­ment. Stronger growth could be greatly as­sisted by re­duc­ing health care costs, reg­u­la­tory bur­dens and the trade deficit, but the fail­ure of Speaker Paul Ryan’s Oba­macare re­place­ment, le­gal bar­ri­ers to quickly de­con­struct­ing Obama-era reg­u­la­tions and com­plex­ity of rene­go­ti­at­ing in­ter­na­tional trade ar­range­ments leave cutting taxes as the most vi­able path for Repub­li­cans to ac­com­plish progress quickly.

Un­for­tu­nately, Mr. Trump and the Repub­li­cans are hung up by con­flict­ing ob­jec­tives and spe­cial in­ter­ests that make the prospects for suc­cess dif­fi­cult.

U.S. cor­po­rate taxes are much higher than those im­posed by ri­vals like the United King­dom, Ger­many, Ire­land and China, be­cause other na­tions rely more on con­sump­tion than in­come taxes — usu­ally, value added taxes (VATs).

The U.S. code is rid­dled with spe­cial in­ter­est cred­its and ex­emp­tions whose net ef­fect is to im­pose very high taxes on some busi­nesses while oth­ers pay not much at all. Find­ing the right K Street lob­by­ist is too of­ten a bet­ter in­vest­ment than de­vel­op­ing a new or bet­ter prod­uct.

Ways and Means Chair­man Kevin Brady is push­ing a plan to lower the top cor­po­rate tax rate from 35 to 20 per­cent by rip­ping away many spe­cial in­ter­est pro­vi­sions and shift­ing the ba­sis for busi­ness tax­a­tion from where prod­ucts are made to where those are con­sumed. To yield the same rev­enue as the cur­rent law and be con­sis­tent with the lat­ter prin­ci­ple, it would not im­pose taxes on prod­ucts made in the United States for ex­port, and col­lect the 20 per­cent tax on im­ports.

Re­tail­ers like Wal-Mart strongly oppose such bor­der tax ad­just­ments (BTAs) on im­ports be­cause they al­lege it would raise prices on im­ported con­sumer goods by 20 per­cent. That may sound plau­si­ble but is un­likely, be­cause re­tail­ers would also be pay­ing lower taxes on their ware­hous­ing, dis­tri­bu­tion and mer­chan­dis­ing ac­tiv­i­ties. Nev­er­the­less, re­tail­ers have found many al­lies among Repub­li­cans in the Se­nate to oppose the Brady plan.

If a cor­po­rate re­form bill — or the com­bi­na­tion of cor­po­rate and per­sonal tax changes — is not rev­enue neu­tral, it can­not be put into law for more than 10 years through bud­get rec­on­cil­i­a­tion, which re­quires only a sim­ple ma­jor­ity in the Se­nate and no votes from Democrats if Repub­li­cans main­tain sol­i­dar­ity. Tax changes that au­to­mat­i­cally ex­pire in 10 years or less would do lit­tle to in­sti­gate more long-term in­vest­ments in man­u­fac­tur­ing, re­search labs and the like.

Repub­li­cans in the Se­nate are not likely to gar­ner much sup­port from Democrats to pass mea­sures that cut cor­po­rate or top in­di­vid­ual tax rates and in­crease deficits.

Most U.S. busi­nesses — even some large ones like Chrysler and Bech­tel — are or­ga­nized as lim­ited li­a­bil­ity cor­po­ra­tions and pay taxes through the per­sonal in­come tax code. Hence, lowering the top mar­ginal tax rates of 39.6 and 35 per­cent is also es­sen­tial to stim­u­lat­ing more in­vest­ment in the United States.

Lowering those rates sig­nif­i­cantly with­out los­ing rev­enue and in­creas­ing bud­get deficits will be tough, be­cause Mr. Trump has promised a mid­dle­class tax cut. And the lat­ter nec­es­sar­ily in­volves shift­ing more of the tax bur­den onto the top quar­ter of tax­pay­ers, who al­ready pay more than 85 per­cent of per­sonal in­come taxes col­lected.

The only way out for Repub­li­cans is to im­pose a new tax to fi­nance lower cor­po­rate and per­sonal in­come taxes — no­tably, a VAT as ap­plied by most other ad­vanced in­dus­tri­al­ized coun­tries.

Those na­tions im­pose BTAs. Fail­ing to do so with a U.S. VAT would per­mit for­eign-made prod­ucts to en­ter U.S. mar­kets with­out pay­ing a VAT abroad or here, while U.S.-made prod­ucts would be sub­ject to the new U.S. levy. That would woe­fully dis­ad­van­tage the lo­ca­tion of pro­duc­tion in the United States and de­feat the orig­i­nal pur­pose of tax re­form — to boost U.S. in­vest­ment and growth.

The bot­tom line is that Mr. Trump and Repub­li­cans can only cut taxes to ef­fec­tively boost growth by em­brac­ing a VAT with BTAs and dis­ap­point­ing Wal­Mart and other re­tail­ers. My bet is they won’t ac­com­plish much more than mar­ginal changes in the tax code, and 2018 will be a good year for the Democrats.

ILLUSTRATION BY DONNA GRETHEN

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