Search This Blog

Wednesday, July 19, 2017

Let's See About Taxes

The GOP is about to embark on a tax cutting exercise.  It's important for the senators and congressmen to pay attention to a few rules in this process:

1.  Keep it all simple.  The bill will need to be explained, something that was not really done with the healthcare bills.  No doubt the Democrats will scream about how this is just a gift to the rich, and there has to be a coherent answer to that charge.  More than just an answer, there has to be an affirmative case made for the tax law changes.

2.  The focus needs to be on business taxes.  Those are the taxes that are hurting our economy in a major way.  The USA has the highest corporate tax rate in the developed world.  It means that every time a company has to decide where to put a new facility, the USA starts by being burdened by its high tax rate.  Also, there is a huge pot of money kept by American companies outside of the USA to avoid American taxes.  It's all legal, but it is something that needs to end.  A change in the law on that point could bring something like one and one-half trillion dollars into the US economy.  That alone ought to means an uptick in the growth rate of 2% or more for a number of years.

3.  Ignore the CBO and the deficit.  Surely, the CBO will score the tax change bill and will find that it will add to the deficit.  There are two reasons for this:  first, the CBO never looks at the resulting economic growth and additional tax revenues that this will generate.  Instead, the CBO assumes that growth will remain unchanged (which is totally wrong.)  Second, the CBO also assumes that all the cash held by US companies overseas will be brought back to the USA and then taxed at 35%.  This is a ridiculous assumption.  The reason there is more than two trillion bucks held overseas is that companies refuse to bring their profits back to the USA just so they can avoid paying the tax.  If the tax on profits brought back to the USA is dropped for a year to 7%, the net effect will be to have something like 1.5 trillion in cash brought back to the USA and the treasury will actually get extra revenue of over 100 billion dollars from the taxes on those funds.  The economy will also get an enormous boost and that will generate hundreds of billions of dollars of extra tax revenues as well. 

4.  Give the taxes a ten year life span.  To use reconciliation, the senators must either produce a bill which the CBO considers deficit neutral or else put a ten year limit on the provisions.  As discussed in item 3, there is no way to get a bill that the CBO will consider deficit neutral.  The GOP shouldn't even try for this.  It would be a waste of time.

5.  Forget the border adjustment tax.  There are those in the House who want to impose taxes on imports in the nature of a national sales tax.  This may be a good idea, but it is too complicated to explain the benefits easily and it offers the demagogues among the Democrats a target at which to shoot.

6.  Promote business investment with a provision allowing the expensing of most new equipment and facilities.  Of all the items that promote economic growth, business investment is the most important.  Providing a push for that sort of investment will give the country the most bang for the buck.

7.  Try to simplify the current tax rates and structure.  This covers both personal and business taxes.  Special provisions in the code that benefit one group or another should be deleted.  This alone will make the code much fairer.  The money raised by closing the loopholes can be given to every taxpayer by raising the personal exemption or by lowering the rates a bit.  If this becomes too complicated, however, the effort should be dropped so that the business tax plan can be adopted.

The mantra of the GOP should be economic growth and better and more jobs for Americans.  It is a message that can be explained easily, and it contrasts well against the Democrats message that the economy just can't do better than now.  The Democrats' new normal is just too bleak to accept.

No comments: