International Tax Policy, Blah, Blah, Blah
Posted on April 21, 2010International tax policy is boring.
Jobs, American competitiveness, and the future of the world economy and America’s place in it, is not so boring.
The boring stuff has a profound impact on the more exciting stuff.
This morning, Doug Holtz-Eakin, the President of the American Action Forum, hosted a policy forum entitled “Why Does International Tax Policy Matter.” The forum included presentations by rising political star Paul Ryan, a House Republican from Wisconsin; Gene Sperling, a senior Counselor to the Treasury Secretary; William Beach, an economics scholar from the Heritage Foundation; and Barbara Angus, a highly-regarded international tax lawyer who used to work for the Treasury Department.
The presentations varied in their excitement level, ranging from somewhat interesting, to kind of boring to deathly boring. For the layman (and I consider myself a layman), the stuff might be dull, but there is nothing dull about the real impact of our current international tax policy. It is killing jobs and facilitating the movement of our companies from the US to places elsewhere, usually through mergers or acquisitions. If you don’t believe me, think now who owns the King of Beers.
Ryan is a policy geek, but he is also a politician, so he has figured out how to talk about this issue in ways that make sense to non-geeks likes me. He uses the example of his home-state manufacturer Harley-Davidson, a company that has to compete with international competitors from Italy and Japan and yet faces the American corporate tax rate, which is the second-highest in the world and a complex regime of international taxes which more often than not leads to its products being double and triple taxed. Ryan, noting that the corporate tax rate actually generates only six percent our national revenue, thinks we should just ditch it, and replace it with a business Value Added Tax (VAT), that could be easily removed as our products move overseas, making American products much more competitive on the world stage. That kind of tax simplification would also likely lead to more companies staying here in America, meaning that more jobs would stay here in the states.
While Ryan focused on how we could make our corporations be more competitive on the international stage, Sperling focused on how we could get corporations to pay more in taxes. In fact, he touted, as the lone accomplishment of the Obama Administration, its efforts to crack down on over-seas tax cheats. For Sperling and the Administration, it is all about balance. How do you make sure that everybody is paying his or her fair share while you make sure that the playing field is tilted in favor of job creation? He acknowledged that finding that balance is difficult, and brought up the issue of tax deferral as a perfect example of those difficulties. Sperling believes that it is unfair for a multi-national company that sets up an international subsidiary to be able to defer taxation on overseas sales if those profits stay overseas. He thinks that that gives a perverse incentive to companies to move their manufacturing jobs overseas.
These two approaches really highlight the philosophical gulf between Republicans and Democrats. Republicans are focused on job creation through tax reform. Democrats are focused on collecting more tax revenue by creating more “fairness” in the tax code. Republicans think that the tax system is broken because it makes our companies less competitive. Democrats think that the tax system is broken because corporate America is able to avoid paying more corporate taxes.
Fundamental tax reform is difficult, as evidenced by the fact that it hasn’t happened since 1986. One of the reasons is that the business community would rather lobby separately, looking for their own differential advantages, instead of working together to push for a simpler and lower rate. Sperling said that because international tax policy is so complicated and intricate, politicians should resist the urge to simplify the argument and should reject injecting passion into the debate. I disagree. The only way you are going to get a tax regime that helps job creation and keeps America truly competitive is if you use passionate and eminently understandable arguments.
Everybody knows that our domestic tax code is a mess, but because so many pay so little, there seems to be no momentum to really change it at a fundamental level. But nobody really knows how our international tax system is killing our competitiveness, curtailing our productivity and stunting our economy’s growth.
A wide-ranging discussion of international tax policy may seem to be quite a bore, but its deeper implications are anything but boring for Americans who are wondering where their next job is going to come from.