The Republicans Need to Get Serious About Taxes Again
It’s been said that the Republicans erred in addressing Obamacare’s myriad shortcomings ahead of tax reform. The thinking is that economic growth wrought by tax cuts would make for an easier legislative climate, including one for eventual healthcare changes. In truth, Republican voters should be glad the Party’s legislators didn’t lead with taxes, mainly because the GOP is divided on the matter. Worse, each side misses on the kind of tax cuts that would prove most effective.
Consider the unwillingness of Paul Ryan and Kevin Brady to walk away from their “border-adjusted” tax. That it fails economically, politically and logically hasn’t deterred them. Ryan and Brady cling to an unreal world in which importers and exporters are distinct individuals, as opposed to two sides of the same coin.
Back to reality, to export is to import. Exporting is an expression of wants, and Americans enjoy abundant inflows of goods and services precisely because they produce so much. Ryan and Brady puzzlingly want to raise a massive tax on what is an effect of American productivity, and that will burden every single American.
To the above, border-tax proponents reply that there will be no tax, that tax-code favoritism for exports will drive the dollar up 25%, thus mitigating higher prices for everything. But as HCWE president David Ranson has pointed out, “There is no precedent for such a large currency adjustment. In no year since records began in 1973” has “the foreign-exchange value of the dollar risen as much as 12 percent, let alone 25 percent.” Furthermore, the dollar’s exchange value is largely a Treasury/presidential function, and President Trump has long expressed a preference for a weaker dollar.
More troubling, the argument in favor of a border tax is that a levy on imports in concert with no taxes on exports will create even greater incentives for U.S. based production. What proponents miss is that the same American production that rates so much in the way of imports is an effect of our efficient utilization of the world’s resources, both human and physical. They plainly don’t see that a tax incentive meant to induce more U.S.-based manufacture of goods is one that promotes less efficient use of human and physical capital by U.S. producers. Reducing all of this to the absurd, it’s likely true that American factories could produce the world’s greatest t-shirts, but only at the expense of much more profitable endeavor.
That Americans leave low-value work to the less developed parts of the world happily explains why we’re the recipients of so much of the world’s plenty: our embrace of the global economy and our production without regard to country borders is the driver of the imports that signal our staggering wealth. Apple would be quite a bit less valuable if it manufactured everything stateside, yet Ryan and Brady want to penalize our most valuable companies for having globalized their operations, along with every single American.
The problem now is that the response among Republicans eager to see the border-adjusted tax die a quick death isn’t much of an improvement. Rather than countering with quick income-tax reductions on every American, most on the right have focused their energies on corporate-tax reduction, reduced levies on foreign earnings repatriated to the U.S., and immediate expensing of plant and equipment purchased by corporations. Each misses the mark for different reasons.
Regarding subsidized plant & equipment purchases, per the correct Republican view that taxes are about incentives, such a subsidy promotes wasteful usage of precious resources. Much worse, it subsidizes yesterday’s companies like General Motors at the expense of more advanced ones of tomorrow like Uber. Uber’s creation of an app that brings sellers and buyers together is the source of its $70 billion valuation; one rooted in very little plant & equipment. The latter describes Apple, Amazon and Google too. The assets of these advanced companies are the people who show up for work each day, yet Republicans are crafting a plan meant to subsidize the doings of companies from the past, and that require enormous amounts of heavy machinery to conduct business. So while corporations as taxpaying entities are a fiction as is (shareholders pay all taxes), the plant & equipment subsidy embraces yesterday at the expense of today and tomorrow. At risk of being repetitive, Apple’s high valuation is a function of it leaving the manufacture of its phones and computers to other parts of the world where plant & equipment still inform innovative economic activity.
Regarding repatriation of foreign earnings, missed by its proponents is the basic truth that there’s no such thing as “offshore money.” More to the point, there isn’t $2 trillion “stranded overseas.” Regardless of where earnings take place, they’re not subsequently stuck in a vault. Instead, they’re invested or deposited in accounts at which point “money” goes to where it’s treated best. Applied to U.S. corporations, the fact that they have so much in global earnings is not a function of them being unable to bring the earnings back to the U.S. without facing a tax. Figure that if they want to repatriate sans taxation, they can do as Apple and other companies have done and simply issue debt. The main thing is that money and the resources it can be exchanged for never sits idle. While there should be no repatriation tax much as there shouldn’t be a corporate tax, we can’t ignore Robert Mundell’s essential point that “the only closed economy is the world economy.” If money is “overseas,” it’s there because that’s where potential returns are seen as greatest. Bad economic policy in a broad sense, including the possibility of a border tax, is the barrier to capital inflows into the U.S. The repatriation tax borders on irrelevant to the capital flows conversation.
Which brings us to the corporate tax. Those in favor of reducing it say we presently have the “highest corporate tax in the industrialized world.” But we don’t. Evidence supporting the latter concerns just how little the corporate tax raises in the way of tax revenues. The paradoxical truth is that the U.S. corporate tax is high precisely because it’s low. If it were truly high, the U.S. wouldn’t be the top recipient of foreign investment. That the U.S. receives so much foreign investment is a happy signal that the U.S. itself is one of the world’s greatest tax havens. Investment here is treated well relative to the rest of the world, plus it’s well-protected by what remains the world’s most advanced military. All of this isn’t to excuse a tax that should be zero, as much as it’s to say that incentives for businesses to have a U.S. presence are already great for a variety of reasons, including a corporate tax that is low in an effective sense.
All of this explains why a swift reduction in individual income tax rates is the way to go. It makes sense politically simply because every voter will notice a difference in disposable income with great immediacy. Even better is that across-the-board income tax cuts would reduce the burden on the rich the most. This is crucial given the basic truth that the rich, by virtue of being “rich,” uniquely possess excess funds that will be quickly directed to entrepreneurs and businesses eager to expand and/or turn existing ideas into concepts. All of this amounts to a substantial improvement on legislation meant to subsidize corporate consumption, lighten the mirage that is the repatriation tax, and reduction of a corporate tax that isn’t nearly as burdensome as its opponents suggest it is. Conversely, the positive effects of income tax cuts will be immediate in a political sense as the size of paychecks grow, and near immediate in an economic sense as more capital is matched with entrepreneurs and businesses.
So while none of what’s written should be construed as support for the corporate tax, it should be construed as support for what will have a much greater impact than a corporate tax cut presently would. Republicans need to get serious about taxes again, and income tax cuts will be a certain sign that they are.