Two tax points: Why is the biz code still a mess and why are we still arguing about trickle-down?

April 13th, 2016 at 12:55 pm

1) Our duct-taped tax code

This WaPo editorial provides a clear and efficient explanation of the inversion problem, where a US company basically moves its tax mailbox, as opposed to its operations, to a low-tax country. The ed board argues that the villain here is neither the Obama administration’s Treasury Dept nor the companies. The former are doing due diligence protecting gov’t coffers and the latter are following unfortunate incentives in our mess of a corporate tax code. The bad guy is…wait for it…everybody’s favorite villain…Congress! Quelle surprise!

Enough members won’t make the necessary changes in the code to block inversions, presumably because they’re paid not to do so by donors who benefit handsomely from the status quo (that last bit is me, not the ed board—but I’ll betcha I’m right!).

Is this view too soft on the companies? Are corporate desertions inversions not unpatriotic? That’s certainly a critique I’ve heard, but patriotism, globalization, and shareholder value collide in ways that…um…complicate simple judgments. What these companies are is freeloaders. They’re taking advantage of our infrastructure, rules of law (e.g., patents), educated workforce and so on without paying their fair share.

Where the editorial goes off is in its stretch to create some kind of equivalence here, one which rings totally false (my bold):

The U.S. corporate tax code remains an uncompetitive mess. Republicans in Congress and President Obama have promised repeatedly to do their duty and reform it.

Wait, wut? Team Obama, since back when I was a member, has been trying to both take legislative action against inversions and to reform the business side of the tax code (in fact, they updated their proposal just last week). Importantly, the reforms they’ve proposed are not that different from those conservatives have touted: basically, lower the rate, broaden the base. But to say they’ve had no takers is an understatement.

I’m not proud to admit that I’ve fixed many a problem with duct tape. It works in a pinch, but no one would mistake it for a real fix. Without a partner for reform, the administration has had to duct tape the code together, which they would readily admit is not the right way to do tax policy. For one, the next president can come in and change the rules back to what they were, adding a damaging level of lurch to an already screwed up system.

It is, of course, much harder make such a lurch with legislative changes. But that’s not Obama’s fault.

2) A compelling, old chart on the folly of “supply-side” tax cuts

I’m revisiting some work examining the claim that supply-side tax cuts pay for themselves (or get anywhere close to doing so) through unleashing growth effects. If you’re thinking “why? Isn’t that idea deservedly dead?” I assure you you’re very wrong. Look at any Republican budget, whether it’s the House of Reps or the candidates running for president, and you’ll see a veritable storm of trickle-down fairy dust.

It’s a classic zombie idea, impenetrable to facts, as I was reminded when stumbling upon this figure from a 10-year old CBPP paper, comparing the growth of real, per capita GDP against that of federal revenues under three different tax regimes: the 1980s (lower rates), the 1990s (higher rates), and the 2000s (lower rates; yes, these tax regimes were more nuanced than that, but no so much so; also, the 2000 bars seriously need updating, as they were forecasts from 2006).

Source: CBPP

Source: CBPP

As you see, growth/capita was about the same under each regime. What differed—un autre quelle surprise!—was revenues. That’s right, folks. You cut taxes, you lose revenues. One can build dynamic scoring models to make that go away, but in real life, that’s what happens, both at the national level and in the states, (see Kansas).

And yes, I know—I said it above—that facts don’t kill zombies. But they’re all I’ve got.

More to come…

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3 comments in reply to "Two tax points: Why is the biz code still a mess and why are we still arguing about trickle-down?"

  1. Jill SH says:

    I’ve thought for a long time that if trickle down had really worked, over the decades that is has been propounded, that we’d all be drowning in the Flood.

    I’d show you a look at another state’s foolishness, NH, but I can’t seem to post a jpeg in this box. Short version: Since 1999 state general fund revenues have gone from $1039 million to $976 mil (in 1999 dollars) while property tax revenues state-wide have gone from 1588 mil. to 2019 mil. But our income tax is 0% (ie we don’t have one) and we don’t have any broad-based sales tax. Major source of tax revenues is business taxes. The no-tax mantra holds firm in our state capital.

  2. Smith says:

    I strongly protest the idea that “lower the rate, broaden the base,” is any sort of “reform”. Instead it is a subterfuge to allow corporations to safely avoid higher taxes with less effort. Any measures “not that different from those conservatives have touted” should clue you in about the end result. Obama has been consistently blind on most tax issues, including the idea that corporate taxes are high in comparison to developed countries. For example, conservatives might compare German federal corporate tax rates without taking into consideration substantial state taxes. American corporate tax rates are not competitively disadvantageous. But they are definitely too low.

    The way to close loopholes is to close loopholes, not lower rates. The most (in)famous case of “lower rate, broaden base” reform (although for personal income) was the 1986 Reagan (really Reagan-O’Neil-Gephart-Bradley) tax cut and we know how that turned out.

    Another popular “reform” is the tax holiday or low repatriation rate, and then some inadequate measure that encourages more overseas investment and parking profits again.

    This is why inequality rises, because the Democrats enact Republican lite legislation.

    One might also mention domestic inversion, like Citibank’s consumer credit operations in South Dakota, and everyone else in Delaware, not for tax purposes, but other legal considerations.

    • Jared Bernstein says:

      It’s actually probably worse than this. When certain politicians say, “We should lower the rate and broaden the base,” they really mean “We should lower the rate.”