Tax Reform: Break-Up Edition

This article originally appeared at the George W. Bush Institute. Click here for the original article.

By Ike Brannon

As I was finishing graduate school I began dating a comely woman who happened to be in her last year of school as well. A couple of months into what I thought was a pretty good run, she received a prestigious two-year fellowship at some out-of-the-way place a good thousand miles from where my job was waiting.

Despite the eventual long-distance relationship still being nine months in the future, it proved to be an immediate death-knell for our relationship. I didn’t understand it then, being a guy who’s never had a particularly long time horizon, but it makes perfect sense to me in my senescence. If something doesn’t have a future, why go through the trouble of getting to know someone, learning their quirks, and coming to a better understanding as to who that person really is? It’s easier to move on and meet somebody new, which is precisely what she did.

And myself as well, once I comprehended what happened.

Similarly, House Ways and Means Committee Chair and tax reform aspirant Dave Camp is about to move on, as is Senate Finance Committee chair Max Baucus.

The problem is simple: There’s no future at all for tax reform, at least not for these gentlemen. Or to be more precise, there is no future for tax reform under the current Administration and with Harry Reid as the Senate majority leader. Unfortunately for Camp and Baucus, this status quo will not change before their respective tenures as committee chairs expire.

While Republicans in the House and Senate — and more than a few Democrats — would love to fix the tax code that both parties agree is broken, there are no prospects that the two parties are going to come to any agreement with what those fixes will look like.

For Republicans, the problem is that the code is inimitable to economic growth: It deters investment, entrepreneurship, and work. The latter is especially true for low-income households who receive government assistance of some sort. University of Chicago economist Casey Mulligan estimates that the government will claim effectively half of any additional increases in income in the next few years, thanks not only to high marginal tax rates but also due to the phase-outs of various assistance programs whose munificence grew during the Great Recession.

Democrats see the tax code’s primary flaw being its lack of progressivity. Whether progressivity in the code is indeed a problem depends on a person’s personal perspective, of course. But it’s worth noting that our current code is more progressive than it was during the Clinton epoch, which candidate Obama remarked as being “about right” in terms of progressivity back in 2008.

To rectify the perception that the wealthy aren’t paying their fair share, Senator Baucus recently released a “study draft” for reforming the corporate tax code that would essentially increase the tax obligations for U.S. firms that do business abroad.

To say that this isn’t high up on the list of problems that Republicans worry about is a gross understatement. A major beef that the GOP tax wonks have with the current tax code is that U.S. businesses that operate overseas face a significantly higher tax rate than their foreign competitors, who typically only have tax obligations to the country in which they do business. Not so for U.S. companies who owe taxes to the U.S. as well as their host country in an effort to equalize tax rates across a company’s global operations.

The purpose of this so-called worldwide tax system is to remove any tax incentive for companies to move operations — and jobs — overseas. But imposing higher costs for U.S. companies abroad means they sell less overseas as well. Although this tax regime does result in fewer jobs for U.S. businesses abroad, it doesn’t mean those jobs are then going to be done within the U.S. No matter how much we jack up the tax rate on overseas income, Pepsi is not going to make soda or potato chips in the U.S. and export them to Poland, and there’s no cost-effective way for P&G to ship shampoo across the Atlantic and be competitive in the European market, either.

A tax officer of a Fortune 500 corporation recently told me that his staff estimated that they have an effective tax rate five percentage points higher than their international competitors. The Baucus proposal would exacerbate that difference.

It’s almost a trite cliché to lambaste the two parties for their inability to get things done in Congress, but the problem goes beyond the political. When it comes to tax reform the two parties not only have vastly different perceptions of how the economy functions and how businesses make decisions, but also about what the goal of any reform should be in the first place — to increase the pie or just split it more equitably?

Either hurdle alone would be daunting for the prospects of reform. Together, they represent an insurmountable hurdle to getting it done.



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