Not Taxed Enough Already?

, Malcolm A. Kline, Leave a comment

A key dividing line between those within the Ivory Tower and those without might be on the issue of taxes: Academics like them while the rest of us clearly don’t.

Moreover, as evidenced by the TEA party movement, this becomes particularly problematic when we don’t show the tolerance for increased rates of taxation that scholars think we will demonstrate. The TEA in the parties, after all, is an acronym that stands for “Taxed Enough Already.”

“After the major Reagan-era tax cuts in 1981, the corporate tax has provided less than 12 percent of federal revenues in all but four fiscal years, during the period 2005-2008, when a booming financial sector generated temporarily high profits and tax revenues,” Berkeley economist Alan J. Auerbach writes in a December 2010 study published by the Center for American Progress (CAP). “Few analysts expect a rebound back to those levels.”

“The declining importance of the corporate income tax is particularly troubling as budget pressures increase.”  Actually, what made those profits and revenues so temporary were the tax increases of 1990 and 1993. Auerbach should know about at least one of these: He was deputy chief of staff of the U. S. Joint Committee on Taxation in 1992.

Currently, “With rising international capital flows, multinational corporations, and cross-border investment, countries’ tax rates and tax structures are of increasing importance,” Auerbach notes in his CAP study this year. “Indeed, part of the explanation for declining corporate tax rates abroad is competition among countries for business activity.”

“Given that the United States has a relatively high corporate tax rate of 35 percent, some observers suggest that we must join this ‘race to the bottom’ by reducing rates and further eroding tax revenues to keep business activity and jobs in the United States.” This is a race that Auerbach would clearly like to avoid.

“The corporate tax can survive as an important source of federal revenue, but its survival and the alleviation of concerns about its effects on the economy require that it be reformed to address the challenges above.”  Auerbach believes he has found a relatively painless way to preserve and strengthen corporate taxes.

“Current corporate tax systems generate incentives that result in the current environment where countries compete for multinational business activity by lowering their corporate tax rates,” Auerbach argues. “To remedy this situation, sales abroad would not be included in corporate revenue nor would purchases or investment abroad be deductible in the second major piece of the proposed corporate tax reform.”

“As a result, the corporate tax would be assessed based on where a corporation’s products are used rather than where the corporation is located or where the goods are produced.” Thus, Auerbach would tax consumption, at a time when people are consuming less due to the economic downturn.

“This new tax system also would retain or even increase the progressive element of the corporate tax system,” Auerbach asserts. “The proposal would effectively implement a tax on consumption in the United States that is not financed out of wage and salary income.”

President George Herbert Walker Bush tried something like that during his one term in office by introducing a so-called “luxury tax.” “In the early 1990s, I remember watching Sen. George Mitchell sing the praises of a new luxury tax that would ‘tax the rich,’” former House majority leader Dick Armey recalled in a Wall Street Journal op-ed three years ago. “But as any Economics 101 student might have predicted, the immediate effect of this luxury tax was a sharp decline in sales of ‘luxuries,’ particularly new boats, and a dramatic loss of boat-related manufacturing and service jobs.”

“It was less than a year before Sen. Mitchell was working to lift the tax so his constituents in boatyards in Maine could get back to work.”

For her part, Auerbach’s fellow Berkeley economist Laura Tyson, herself an alumnus of the Clinton Administration, agrees with her colleague. “Deficit reduction is a means to an end but not an end,” she told the audience at a CAP conference e on December 3, 2010 in response to Auerbach’s paper. “We need it for economic growth but we need investments,” Tyson claimed.

By investments, Tyson meant government spending, a twist of phrase perfected by President Clinton and his appointees. “I’m afraid that at the end of the day the U. S. is going to have to adopt a combination of a territorial [tax] system with a VAT [Value Added Tax].” Tyson used the word afraid as a figure of speech but many do fear such an outcome, and they tend to be the entrepreneurs who create jobs.

Malcolm A. Kline is the Executive Director of Accuracy in Academia.

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