Wednesday, November 14 , 2018, 4:41 am | Fair 50º

 
 
 
 

Veronique de Rugy: Three Priorities to Guide Tax Reform

Congress is finally tackling the tax code, which is good news because reform is badly needed. Our outdated code is complicated by thousands of credits, deductions and exemptions to individual and corporate interests — and it imposes high rates that inhibit economic growth.

However, as we've seen with the failed efforts to repeal and replace Obamacare, getting a consensus among Republican members is easier said than done. It should boil down to three priorities.

First, though overhauling the whole tax code would be great, if the goal is economic growth, reforming the corporate side is the most pressing priority.

Everyone knows the corporate tax system is a punishingly inefficient and large driver of corporate avoidance. Ideally, a reform plan could cut the rate dramatically and move the United States from the highest to one of the lowest rates among industrialized nations.

The president has talked about 15 percent, which would make U.S. companies significantly more competitive abroad and at home while dramatically reducing the need for tax avoidance and inversions.

It should also replace "depreciation" with "full expensing."

This sounds like a bunch of tedious jargon, but all you need to know is that companies generally aren't allowed to immediately deduct (expense) their investment costs when calculating taxable income and that this creates a bias against business investment.

Some exceptions exist and create their own problematic biases because they're targeted toward particular industries or activities supported by politicians.

Different rules make for a more complex tax code, encourage lobbying and lead to special privileges for the well-connected. Full expensing would flatten all this out.

These reforms would boost the economy, American competitiveness and job creation the most. A corporate tax reduction would boost standards of living through higher wages, too. That's because the majority of the corporate tax is shouldered by workers, in the form of lower wages.

The second priority? Congress needs a budget. Without that, there's no reconciliation — the process by which Republicans can bypass the need for 60 votes in the Senate. Without that, there's no reform.

However, the rules of reconciliation require that tax reform be deficit-neutral outside the 10-year budget window. A lot of the current tension about tax reform is caused by a disagreement about how to meet the deficit-neutral constraint.

A third priority requires tax reform be paid for. The best way to do that, however, is to restrain spending. We're $20 trillion in debt and heading once again to a $1 trillion deficit, even before the tax cuts.

Extending and strictly enforcing the previously bipartisan and quite modest Budget Control Act caps of 2011 until 2025 would pay for tax reform without resorting to new sources of revenue such as the misguided value-added tax, a carbon tax or a border-adjustment tax.

Getting rid of genuine loopholes that benefit individuals and corporate interests would also help pay for tax reform.

The exclusion for employer-provided fringe benefits, the state and local tax deduction, and the deduction for U.S. production activities are ripe for repealing and could allow for trillions of dollars in tax cuts.

Congress could approve a tax cut that expires after 10 years, of course, but temporary tax cuts are less conducive to growth because entrepreneurs and investors realize there's no permanent change in incentives to create jobs, income and wealth.

All of this leads to a problem. If Congress and President Donald Trump aren't willing to impose spending discipline, and if they're unwilling to tackle a sufficient number of major loopholes, that presumably means there won't be fiscal room to get a large rate cut and expensing.

Politically, it could be easier to push for just a rate cut at the price of expensing, because it's imperative the corporate rate be dramatically reduced and — let's face it — most people don't even know what expensing is.

The bad news is, leaving expensing behind would be a missed opportunity. We know politics isn't always conducive to good economics, and the good news is, you can't go wrong with cutting the corporate tax rate — but Congress can and should do more than the bare minimum.

— Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University, a columnist for Reason magazine and the Washington Examiner, and blogs about ecomomics for National Review. Click here to contact her, and follow her on Twitter: @veroderugy. Click here to read previous columns. The opinions expressed are her own.

Support Noozhawk Today

You are an important ally in our mission to deliver clear, objective, high-quality professional news reporting for Santa Barbara, Goleta and the rest of Santa Barbara County. Join the Hawks Club today to help keep Noozhawk soaring.

We offer four membership levels: $5 a month, $10 a month, $25 a month or $1 a week. Payments can be made using a credit card, Apple Pay or Google Pay, or click here for information on recurring credit-card payments and a mailing address for checks.

Thank you for your vital support.

Become a Noozhawk Supporter

First name
Last name
Email
Select your monthly membership
Or choose an annual membership
×

Payment Information

Membership Subscription

You are enrolling in . Thank you for joining the Hawks Club.

Payment Method

Pay by Credit Card:

Mastercard, Visa, American Express, Discover
One click only, please!

Pay with Apple Pay or Google Pay:

Noozhawk partners with Stripe to provide secure invoicing and payments processing.
You may cancel your membership at any time by sending an email to .(JavaScript must be enabled to view this email address).

  • Ask
  • Vote
  • Investigate
  • Answer

Noozhawk Asks: What’s Your Question?

Welcome to Noozhawk Asks, a new feature in which you ask the questions, you help decide what Noozhawk investigates, and you work with us to find the answers.

Here’s how it works: You share your questions with us in the nearby box. In some cases, we may work with you to find the answers. In others, we may ask you to vote on your top choices to help us narrow the scope. And we’ll be regularly asking you for your feedback on a specific issue or topic.

We also expect to work together with the reader who asked the winning questions to find the answer together. Noozhawk’s objective is to come at questions from a place of curiosity and openness, and we believe a transparent collaboration is the key to achieve it.

The results of our investigation will be published here in this Noozhawk Asks section. Once or twice a month, we plan to do a review of what was asked and answered.

Thanks for asking!

Click Here to Get Started >

Reader Comments

Noozhawk is no longer accepting reader comments on our articles. Click here for the announcement. Readers are instead invited to submit letters to the editor by emailing them to [email protected]. Please provide your full name and community, as well as contact information for verification purposes only.