The Tax Reform America Needs (and Probably Won’t Get) – New York Times

While this is probably the most blatant shortcoming of the American tax code, it is hardly the only one. By the standards of most economists, the United States has one of the most counterproductive tax regimes among advanced nations — one that raises little money yet vastly distorts decisions on investing and saving, and encourages all sorts of trickery to avoid the Internal Revenue Service. That shortcoming is keeping the American state from raising the money it needs.

According to a report by the O.E.C.D. on varieties of tax reform, “corporate taxes are the most harmful type of tax for economic growth, followed by personal income taxes and consumption taxes.”

Indirect taxes, such as a sales or consumption tax, or — even better — taxes on immovable property, don’t reduce people’s incentive to save or invest, as direct taxes on personal or corporate income do.

And yet when designing the tax code, Washington eschewed indirect taxes. Instead, the American political system chose the most economically counterproductive tax structure available. On average, indirect taxes amount to 38 percent of tax revenues across the O.E.C.D. In the United States they account for 27 percent. And that is only because of high property taxes, which are levied mostly at the municipal level.

Different Tax Mixes

The United States raises much less money through consumption taxes than other industrialized countries. Despite higher rates on corporate profits, it also raises less in corporate taxes.








Taxes on goods and services as a share of G.D.P.

Corporate taxes as a share of G.D.P.

18

%

9

%

15

Denmark

12

6

O.E.C.D. AVG.

9

Japan

Canada

Canada

Japan

6

3

O.E.C.D. AVG.

Denmark

U.S.

3

U.S.

0

0

’65

’75

’85

’95

’05

’15

’65

’75

’85

’95

’05

’15




Taxes on goods and services as a share of G.D.P.

18

%

15

Denmark

12

O.E.C.D. AVG.

9

Canada

Japan

6

U.S.

3

0

’65

’75

’85

’95

’05

’15

Corporate taxes as a share of G.D.P.

9

%

6

Japan

Canada

3

O.E.C.D. AVG.

Denmark

U.S.

0

’65

’75

’85

’95

’05

’15








(Here, too, Washington skews investment behavior by making property taxes, and mortgage interest, deductible from federal income taxes, pulling money into housing that would generate a bigger economic return elsewhere.)

So even as the United States raises almost the lowest tax revenues in the industrialized world as a share of the economy, in so doing it exacts the maximum possible economic pain. “We are hobbling ourselves because we finance government with taxes on wages and incomes,” said Michael J. Graetz, a professor of tax law at Columbia Law School.

That makes American tax revenues uniquely vulnerable. Corporate profits have soared, rising to 13 percent of the nation’s income in the years of the new millennium, from 9 percent. And yet the I.R.S. just hasn’t been able to touch the stash.

American multinationals, like Apple or General Electric, which must pay tax on their foreign profits but only if they bring them to the United States, employ small armies of tax advisers to help them park costs at home while moving profits abroad, legally dodging tens of billions of dollars in taxes every year.

The strategy doesn’t just make it more difficult to raise tax revenue. It also inhibits economic growth. Trillions of dollars parked overseas are trillions that won’t get invested in the American economy. But despite stabs at reform by the administrations of George W. Bush and Barack Obama, corporate taxes have not budged.

“It is something we need to confront,” said Alan J. Auerbach, a tax expert at the University of California, Berkeley. “I’m a little skeptical that we will be able to come up with something.”

Last week, the Trump administration and leaders in Congress issued a statement promising a head-to-toe revision of corporate taxes as part of an overarching tax reform.

They, too, will most likely fail, and for the same reason. Rewriting the tax code — cutting rates on corporate profits, say, and switching to a system in which only domestic profits are taxed — would cost money. Plugging the shortfall would require raising revenues somewhere else.

That is something the United States political system and its inefficient tax structure find extraordinarily difficult to do.

Photo

Shoppers lining up to buy the iPhone SE at the Apple store in the Ginza in Tokyo. American multinationals like Apple can legally dodge tens of billions of dollars in taxes each year by parking costs at home while moving profits abroad.

Credit
Kazuhiro Nogi/Agence France-Presse — Getty Images

Consider how other industrialized nations managed the decline in corporate tax rates. For starters, they expanded the tax base — removing some incentives to investments, trimming exceptions, loopholes and the like. But they also had a big pot of money that the United States did not: revenues from a value-added tax, which is levied on the consumption of goods and services.

Taxes on consumption — raised mostly through a V.A.T. — add up to one-third of total taxes in O.E.C.D. economies, on average. In the United States, sales taxes — levied by states rather than the federal government — amount to just 17 percent of total taxes.

Congressional Republicans understand that tax reform requires money. They originally proposed raising $1 trillion with a “border adjustment” tax — a levy on sales that would confer tax-free status on exports but would bar businesses from taking imports as an expense.

But now the border adjustment is off the table, opposed by retailers whose businesses rely on imports. So the options for meaningful reform have fizzled, too.

“The revenue loss from the corporate rate reduction is about $100 billion per point over 10 years, so going from 35 percent to 20 percent will cost $1.5 trillion,” Professor Graetz told me. “Where are you going to find the money?”

Professor Auerbach suggests that without new revenues, President Trump’s tax overhaul may amount to nothing more than a big tax cut with nothing to pay for it, which would require some political legerdemain to become law with no Democratic votes. (That was the case with President George W. Bush’s tax cuts, designed to “sunset” after 10 years.)

But this is not what the country needs. What it needs, looking into the future, is to acknowledge both demographic change and globalization.

Virtually every economist contends that paying for current Social Security and Medicare benefits into the future will require not just higher taxes on the rich, but also more money from everyone. There are fewer workers paying taxes for every retiree collecting benefits. The choice is between slashing the retirement package and raising taxes on the young.

Globalization is unlikely to slow much. Governments’ efforts to lure investment with low taxes are unlikely to be over. “Corporate tax rates will probably continue to decrease in the near future,” the O.E.C.D. said. “Moreover, tax revenue is put under pressure at an increasing rate as corporations in a globalized world engage more and more in tax-minimizing strategies.”

Maybe this combination of pressures will ultimately push the American political system to embrace an efficient tax system — one that inflicts less damage on the economy. Then it might be able to raise the money that the American government needs.

Correction: August 1, 2017

An earlier version of this column included an incorrect measure of the role of consumption taxes in the nations of the Organization for Economic Cooperation and Development over all and in the United States. They represent one-third of total taxes — not of gross domestic product — in the O.E.C.D. economies, and 17 percent of total taxes in the United States.

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The Tax Reform America Needs (and Probably Won’t Get) – New York Times