Corporate Tax Reform and the Border Tax

 

Most informed observers of the U.S. economy agree that the Corporate Income Tax of 35% is too high and should be lowered to a rate which is more competitive with other developed countries. Republican Congressional leaders and the Trump administration have agreed that a 20% rate is about the right level.
Now the question is how to make up the tax revenue lost to the federal government from a lower tax rate.  One idea is to impose a Border Adjustment Tax on imports into the U.S. but exempting exports from such a tax.  Since the U.S. trade deficit is currently running at about $500 billion per year (see chart), a 20% tax on imports offset by a 20% tax credit for exports would raise the necessary $1 billion per year.


This week’s Barron’s points out several disadvantages of a BAT:

  • Economic theory predicts that a 20% BAT would mean that the dollar would rise in value by 20%, offsetting the higher costs of imports. But if this happens, then other industries, such as U.S. tourism, would take a big hit.
  • Other countries could retaliate in ways that would be unfavorable to us and cause a “Trump slump.”
  • If a BAT leads to an increase in exports and a decrease in imports, the $500 billion trade deficit will shrink and so the BAT will bring in less revenue than the predicted $100 billion per year.

The Barron’s article suggests much better ways to make up the $100 billion in tax revenue (on a static basis) which would be lost to a corporate tax rate cut to 20%. For example:

  • A corporate tax rate cut of this magnitude would be revenue enhancing (on a dynamic basis), easily raising an additional $50 billion in tax revenue.
  • The CATO Institute recently compiled a list of corporate welfare programs in the federal budget totaling $100 billion. Eliminating just half of this would save an additional $50 billion.

Conclusion. Cutting the corporate tax rate to 20% from its current level of 35% will contribute significantly to faster economic growth. It should be quite possible to keep such a tax rate cut revenue neutral by cutting back on crony capitalism.

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Let’s Do Something about Corporate Welfare and Crony Capitalism!

 

The American Enterprise Institute is one of my favorite Washington think tanks.  It defines its mission as “research and education on issues of government, politics, economics and social welfare.”  I especially like its interest in social welfare which translates for me as being fiscally conservative with a heart.
CaptureThe AEI’s Timothy Carney has just proposed “An anti-corporate welfare, anti-cronyism agenda for the 114th Congress.” Most candidates for Congress condemn crony capitalism and corporate welfare.  This generally means any policies which tilt the playing field, picking winners and losers and rewarding well-connected insiders.  Such actions contribute to the public perception that the “game” is rigged and harm economic growth and innovation.  Here are some prime examples discussed by Mr. Carney:

  • Health Care: repeal Obamacare’s insurer bailout (the “risk corridors”) so that health insurers compete totally on price.
  • Health Care: end the individual mandate which forces people to buy a product from a private industry. An alternative incentive for individuals to remain covered would be limiting enrollment periods, for example, to a brief six-week sign-up period every two years.
  • Energy: end tax breaks and subsidies for both renewable energy (including ethanol) and oil and gas. Make all forms of energy compete in the market.
  • Taxes: make corporate taxes simpler, lower and more neutral. Besides being fairer, such changes will boost the economy.
  • Finance: Rein in Fannie Mae and Freddie Mac by treating them the same as all big banks. This means the same capital requirements, the same tax treatment and the same consumer protection regulation.
  • Finance: Kill Dodd-Frank’s too-big-to-fail designation. It acts as a moat, protecting the big guys from competition.
  • Trade: Kill the Export-Import Bank.
  • Trade: Repeal the Jones Act. It requires all shipping between U.S. ports be done on U.S. flagged vessels.
  • Agriculture: End the Sugar Program which costs consumers $3 billion per year.
  • Agriculture: Reform the Federal Crop Insurance Program by making it self-supporting.

These mostly well-known examples of corporate welfare represent just the tip-of-the-iceberg.  Nevertheless they provide a good place to start in cleaning things up!