Based On A Myth, Republicans Risk Leading Off With A Big Tax Increase
At risk of being repetitive, it’s worth stressing yet again that as taxpaying entities corporations are a fiction. Owned by shareholders, it’s ultimately those same shareholders who pay all corporate taxes. In that case, and in a normal, perhaps idealistic world, the corporate tax would be zero. Figure that individuals have already paid income taxes, which means the corporate tax amounts to a double tax on individual earnings.
Despite the above truth, there’s some mythology that surrounds the corporate tax. While their hearts are in the right place, commentators and economists on the right persistently promote the fiction that the U.S. corporate tax rate of 35 percent is the “highest in the industrialized world,” and as such, this tax renders U.S. corporations “uncompetitive.” But as Heritage Foundation senior fellow Stephen Moore has pointed out, the corporate tax “raises very little revenue for the federal government.”
Well, of course it doesn’t. It doesn’t simply because few companies pay anywhere near the 35 percent rate. The paradoxical reality is that the U.S. corporate tax is very high precisely because myriad loopholes and deductions reduce the effective rate substantially. To be clear, the tax is high so that politicians can hand out favors that reduce it. Indeed, if the latter weren’t true, revenues from the levy would be enormous to reflect the fact that U.S. corporations are some of the most valuable and profitable in the world.
So while the effective corporate tax rate isn’t anywhere close to the “highest in the industrialized world,” that it isn’t doesn’t justify the headline rate. Corporations are able to bring it down by virtue of complying with an increasingly complex U.S. tax code. This isn’t a good thing for the economy. The tax should either be reduced in concert with erasure of all the industrial policy embedded in the code, or in an ideal world, it would be abolished altogether. Still, it’s not realistic for certain members of the right to pretend that U.S. companies suffer tax rates that are the highest in the world.
But here lies the problem. In seeking a reduction of the corporate tax rate, Republican strategists and legislators are talking about replacing some of the already insignificant revenues taken in through the corporate tax with a tax on imports. Worse, the introduction of a tariff on goods imported into the United States would represent a huge tax increase.
That it would is a statement of the obvious. As is already acknowledged by those who support trading a lower corporate tax for a 15% tax on imports, the former doesn’t raise much in the way of revenues as is. It doesn’t simply because there are countless ways around the present, 35% corporate rate.
But with a tax on imports, it’s apparent at least for now that there will be no way around this price. This much is obvious simply because the proponents of the tax on the right have publicly stated how much a tariff on imports would boost federal revenues. Getting right to the point, conservatives aren’t hiding their plan to reduce a tax that American corporations are able to substantially shrink the cost of with one that no American will be able to avoid.
And then assuming the import tariff succeeds in raising a great deal more in the way of federal revenues (as its supporters suggest it will), the tax that is government will grow by leaps and bounds. Lest we forget, politicians invariably divine new ways to spend the revenues they take in. And then once a program is begun, it gradually develops constituencies that cause it to grow and grow. $1 trillion in extra federal revenues in year one invariably morphs into trillions more in spending down the line (government spending the ultimate tax on growth) as small bureaucracies funded by the initial revenues (Medicare began as a $3 billion program in 1965, but by 2020 it will cost taxpayers over $1 trillion annually) search feverishly for new purposes; all of them paid for by you, the taxpayer.
Unfortunately, what is already wrongheaded becomes even more dangerous once we consider what the proponents of this “border adjustable tax system” believe will happen if they get their way. Specifically, they believe that an erasure of taxes on profits from goods made in the United States and exported both domestically and globally will render goods produced in the U.S. cheaper for consumers both domestic and globally. But that’s just not true.
The price of products sold is not increased or decreased by taxes. Prices are set in the marketplace. A lower corporate tax will not magically make U.S. produced goods inexpensive, it will laudably only reduce what company shareholders hand over in taxes; a number that presently isn’t very high as is. As for the prices of consumer goods, their costs will once again be set by market forces.
But tariffs are different from a corporate tax on profits. Tariffs are levied on goods imported with higher prices for those imports the clear goal. They represent an explicit increase in the price of everything we have the temerity to buy from outside the United States. This includes the myriad imported inputs that conservatives would like to tax at a 15% rate, and that U.S. corporations rely on to produce goods for export.
Ok, so we have import-tax proponents promoting the fiction that a lower corporate tax will reduce the price of U.S. produced goods, and based on this falsehood they say that the lower prices of goods produced will lead to a U.S. export surge. They add that under such a scenario the value of the dollar will rise; the idea being that demand for American products priced and sold in dollars will drive up global demand for dollars. But the theorizing from the Tax Foundation is incorrect. That’s the case because as history has made very clear in the 46 years since the dollar’s link to gold was severed, U.S. presidents generally get the dollar they want. Presidents Nixon, Carter, and Bush #43 sought a weak dollar, and markets complied. The economy predictably stagnated during their presidencies. Presidents Reagan and Clinton desired a strong dollar, and markets similarly complied alongside a booming economy. While time will tell, President Trump has regularly expressed a desire for a weak dollar. If so, he’ll eventually get his wish regardless of any Republican flirtation with industrial policy.
After that, explicit in the “make America great again by making goods domestically” neo-mercantilism promoted by the right is the fallacious notion that countries can export without importing. Well, if we ignore up front how impoverishing such a scenario that would be (as individuals, we produce so that we can import), it quite simply doesn’t work. Not only would it be foolhardy for the government of the most economically advanced country in the world to attempt to legislate exports over imports, it can’t be done as is. The only reason to export is to import. Simple as that. Assuming the feds could legislate an export advantage for U.S. producers to the detriment of foreign imports, this would logically lead to reduced global demand for U.S. goods. Stating what should be obvious, if we’re not importing as much we’re not exporting as much. That what’s so basic needs to be stated is very unfortunate, but it’s nonetheless true. With trade, it’s products for products. If the tariff proposed by Republicans renders the U.S. a worse destination for imports, so then will the rest of the world be a more subdued destination for U.S. exports.
Of course, logic dictates that the end result of the Republican tax crack-up will be even worse than described. Indeed, the election of Trump has occurred alongside growing ignorance on the right about comparative advantage. Simply stated, a country economy performs best when its citizens do what most elevates their productivity, all the while leaving less productive work to others. Silicon Valley is rich precisely because it designs products, all the while leaving low-value manufacture of same to poorer countries still reliant on labor-intensive work that productive Americans long ago left behind. The problem is that in promoting their tariff, members of the right seek to take the U.S. economy backwards, and into work that no longer rates American effort. It’s a blast to the past that has the potential to repel the very investment that powers economic growth. Adam Smith made clear long ago that investors run from countries moving backwards. Members of the right, goaded by their new president, seem eager to retreat economically.
And that’s what’s so scary about all this. That Republicans seek a huge, economy-sapping tax increase is a blinding glimpse of the obvious. What’s sad is that their tax increase may with time prove the least bad result of a proposed tax hike that defies common sense.
Originally published on Forbes.