Not Tax Cuts, Tax Reform!
In 1913, when Americans voted to give the federal government vastly expanded taxing authority, they likely could not imagine the massive and hugely complex system that would one day arise. Today, the United States has the second highest corporate tax rate in the industrialized world. But the mindless liberal urge to use tax policy as a form of social policy has them calling for even higher rates. Raising taxes is not the answer; neither is cutting them. We must have real and substantial tax reform. Why is this the only real solution? I’ll tell you.
The World Has Changed
Just to our north, Canada has a corporate rate of 16%. To our south, Mexico’s rate is 28%. In the UK, the highest corporate tax rate is 24%. Russia (formerly known as the Soviet Union) has a top tax rate of 20%. China’s corporate tax rate is a mere 25%! In the US, our top tax rate is 39%.
Thirty years ago, when Reagan, in partnership with Democrats, began the process of reforming the tax system, tax rates for industrialized nations were also high. But when the US prospered from that effort, other nations followed our lead. So, when a liberal says, for the umpteenth time, Clinton raised taxes to 39% and the economy boomed!” I say, “the world was a different place.”
Liberals seem to love change, why can’t they grasp this one? While US rates have gone up, rates in other countries have dropped significantly on corporations.
Effective vs. Real Tax Rate
A more thoughtful and reformed liberal might say, “well, 39% is our effective rate, but it’s not the real rate!” What do they mean by this? Simply that, because of the way our tax system is structured, there are numerous deductions, loopholes, and credits companies can take advantage of to reduce their taxes. In 2009, the real tax rate on the top 1% of earners was 29%, not the 39% effective rate. So there was a 10% gap between the listed rate and what was actually paid.
But this is a big part of the problem, and the real reason why we must talk tax reform, not tax rates. Our rates are deceptive because there are legitimate, legal loopholes to lower the amount of taxes one must pay to the government. In the 80’s, Reagan and O’Neil didn’t cut rates so much as they eliminated loopholes and adjusted the rate so that actual tax rates were much closer to the effective tax rate.
Conservative politicians talk a great deal about a balanced budget amendment. I think equally as valuable would be a law or amendment requiring the federal government keep effective tax rates to within about 3% of real rates. This would force government to reform the tax code on a regular basis, and create more pushback on liberals who seem to think that the answer to all our ills is higher taxes. I have news for you. If rates simply go up without some level of reform, how do you know those “millionaires and billionaires” will pay even one cent more than before?
Actually, it’s likely they’ll pay less. Raising taxes typically increases the tax avoidance behaviors of companies. What is one of the main tax avoidance techniques? Moving some or all operations out of the country. Duh!
Think Globally, Act Nationally
When considering how best to deal with national tax policy, we must think globally. Companies often go where they have the best chance to succeed.
Thanks to the US, the world has become an increasingly interconnected global economy. That’s a good thing. At the same time, we can no longer think nationally when it comes to tax policy.
When Clinton raised taxes in 1994, the economy did fine. GDP growth for the next few years averaged about 3.5%. When Clinton cut taxes in 1997, especially the Capital Gains tax, the economy took off. But in the 1990’s, the world was less connected than it is today, and taxes in other industrialized nations were higher. That’s no longer true today.
It’s very simple; if you want to send more jobs overseas, raise taxes. If you want to bring jobs to the US and see new jobs created, reform them.
But the fatal flaw for liberals is their narrow worldview. President Obama could hold spending steady over the next five to ten years and eliminate our deficit. To do that, all he would have to do is reform the tax code and bring taxes down by 10%-12% across the board.
A simpler tax system means there’s less opportunity to cheat, paying taxes is far simpler (and, therefore, cheaper), and businesses will grow faster. Not to mention the appearance of more new business and the movement of overseas companies to the US. A growing economy means more jobs for all and a large spike in the growth of those who pay taxes. As President Kennedy once said, “a rising tide lifts all boats.”