Personal Finance: Corporate tax reform is worthy but the process is flawed

Personal Finance: Corporate tax reform is worthy but the process is flawed

November 29th, 2017 by Christopher Hopkins in Business Diary

If all goes according to plan, the Senate will vote soon on the much-anticipated tax bill. The core of this ambitious measure (fully 75 percent) is aimed at a long-overdue reform of the U.S. corporate tax regime. While our major trading partners have all modernized their systems and substantially reduced the statutory rate on business taxes, the U.S. holds the unfortunate distinction of imposing the highest corporate tax rate in the developed world.

So all else being equal, this effort to make us competitive with the rest of the world should be broadly hailed. Reducing the nominal rate from 35 to 20 percent closes the gap, while defenestrating numerous loopholes in the current code will help ensure that the tax burden falls equally upon all corporations.

But all else is seldom equal. In this case, legislators decided that selling the plan required the addition of a number of individual tax breaks targeted to beef up support for the full package and impart some marginal economic stimulus to the economy (President Nixon may have been correct: we are all Keynesians now).

The sausage making is unpleasant to watch. The bill's sponsors have all but abandoned their commitment to debt reduction, and have incorporated a number of sun setting provisions that by their own admission they have no intention of honoring.

Christopher Hopkins

Christopher Hopkins

Photo by Contributed Photo /Times Free Press.

In order to avoid having to compromise with moderate Democrats, Republicans adopted a budget resolution that requires only a simple majority vote in the Senate. This allows the bill to pass according to a special procedure known as "budget reconciliation," intended to avoid filibustering of revenue and spending bills.

The budget resolution, far from reducing the debt, allows for an additional $1.5 trillion to be piled on over 10 years. Fiscal responsibility is nice in theory, but it has its limits.

Here's another problem: the bill has been estimated by several non-partisan analysts to tote up closer to $2.2 trillion in new debt, outside the window allowed by the reconciliation process.

So the authors resorted to an age-old fix: they cheated. In a $700 billion game of make-believe, most of the tax cuts for individuals were slated for expiration beginning in five years. If that were allowed to happen, half of all middle-income taxpayers would pay more tax in 10 years than the current tax code demands.

So to hold new debt below $1.5T, many of the benefits are made temporary. Voila, the bill now passes muster.

But what of all those taxpayers facing a huge tax increase down the road? Not to worry: Congress will swoop in at the last minute and make the cuts permanent. This is actually the argument being advanced to garner support: trust us, we're not going to let it happen.

If this sounds cynical, listen to the words of Mick Mulvaney, President Trump's budget director. Mulvaney, a former deficit hawk, acknowledged that the bill includes "gimmicks" designed to "game the system": "So this is done more to shoe horn the bill into the rules than because we think it's good policy."

Too bad. The rationalization of our badly deformed corporate tax structure is actually much needed. Saner business taxation would promote more robust growth by reducing tax-motivated misallocations of resources and encouraging repatriation of foreign profits held offshore by U.S. corporations.

Few economists believe the additional economic growth comes close to paying for the tax cuts, but nearly all agree that it's desirable and could boost output by 1 or 2 percent over 10 years.

A corporate tax reform that is revenue neutral, doesn't pile on more debt, and ditches the mendacious gimmickry would be a worthy accomplishment.

Christopher A. Hopkins, CFA, is a vice president of portfolio manager for Barnett and Co. in Chattanooga.

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