- - Thursday, July 27, 2017

ANALYSIS/OPINION:

Republican leaders are anxious to pivot from health care to tax reform but their optimism is misplaced.

Lowering taxes and simplifying arcane tax codes should unite red-blooded Republicans like no other issue, but they will run into the same obstacles coalescing around a plan as with replacing Obamacare — reforming Medicaid and other entitlements.

U.S. corporate tax rates are the highest among large industrialized countries. Although R&D credits, the oil depletion allowance and other special credits and deductions reduce the bite for many companies, most American businesses still pay more than competitors abroad.

Lowering the 35 percent top rate and simplifying the code are easy — sweep away all the credits and deductions — but that would still leave most American firms with a higher overall tax bill. And it would instigate fierce opposition from Big Oil, technology engines like GE and the Silicon Valley and other companies with large lobbying budgets.

A revenue loss that substantially increases the federal deficit — and provides relief for virtually every corporation — or a new revenue source to finance deeper rate cuts is needed to overcome political opposition. The logical revenue option — applying the corporate tax to imports and rebating it on exports, which would yield about $100 billion a year — engenders huge opposition from Wal-Mart and other retailers even though the competitive effects would be minimal. All retailers would face the same levies on imports and options to source more U.S.-made goods.

Individuals with resources to invest and many businesses — those organized as LLCs and who pay taxes through individual tax returns — often pay marginal rates exceeding 50 percent between the 39.6 percent top individual rate and state and local taxes.

This tax disadvantage significantly contributes to the sinking number of small businesses and slow pace of investment and jobs creation during the recent recovery, but providing relief requires either increasing the deficit or shifting some of their tax burden onto other individuals. The latter is a political nonstarter, especially since Treasury Secretary Steven Mnuchin has promised a middle-class tax cut.

Taxes were slashed and simplified during the Reagan Administration but ballooning budget deficits give President Trump less room to maneuver.

Already large federal deficits require a lot of foreign borrowing, and foreign claims on the U.S. economy already exceed 45 percent of GDP. Without any changes in federal programs, those should increase to 60 percent within a decade. At that level, most economies encounter a severe economic crisis as foreign lenders balk at buying more bonds — Greece and Spain offer recent examples.

All that is left to GOP tax and budget policymakers is to cut spending — no mean trick considering their goal of increasing defense spending and entitlements now consume more than 60 percent of the federal budget and are likely to grow to 100 percent over the next decade.

Cuts in discretionary spending could help fund tax cuts, but opportunities for those pale by comparison to the gold vein in entitlements abuse — for example, each year fraudulent and other inappropriate payments exceed $150 billion and one out of every 20 adults is now on social security disability.

In rural states with weak educational systems and many adults unable to compete for decent jobs in a globalized economy — for example, West Virginia, Maine and Alaska — the game plan for those who don’t want to work anyway is clear: apply for a Social Security disability, food stamps, Medicaid and so forth.

The Republican plan for the FY2018 budget resolution provides for work requirements to trim entitlements outlays — and not by hoisting the truly disabled off Medicaid and other programs as Democrats like Minority Leader Chuck Schumer claim.

Still when Republicans get down to assembling 50 votes plus Vice President Pence to pass a budget resolution, Republican leaders can count on Republican senators from the above-mentioned states — Sen. Shelley Capito, Sen. Sue Collins and Sen. Lisa Murkowski — and a few others who blocked the Senate compromise to replace Obamacare to defend welfare and the right be indolent with the same vigor as freedom of religion.

Republicans may view the path to paradise to be paved by tax reform but remember the biblical proverb about passing a camel and the eye of a needle — think elephants and entitlements reform.

• Peter Morici is an economist and business professor at the University of Maryland, and a national columnist.

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