The corporate tax bill that just passed the House picked up a bit of unfortunate baggage. The centerpiece of the bill is the repeal of the FSC-ETI tax exclusion for U.S. exporters — a subsidy that the World Trade Organization (WTO) has consistently ruled illegal. The WTO ruling led the European Union (EU) to threaten sanctions if FSC-ETI was not repealed. On March 1, the EU followed through by imposing stiff duties, which will increase by 1 percent each month that the FSC remains on the books, on many sensitive U.S. products, including steel, agriculture, livestock and electronics. If left unchecked, the EU sanctions will act as a stifling undertow on the recovering U.S. economy, an outcome neither the American people nor President Bush can afford. The ideal solution would have been a quick, simple repeal of FSC-ETI, which is bad economic policy in any case. The $50 billion in savings could then have been used to streamline and simplify the corporate tax code.
Unfortunately, both the House and the Senate versions of the bill became magnets for special interests. A steady train of lobbyists tacked on $167 billion in tax breaks over the next 10 years to the Senate bill, while the House bill expanded by $143 billion in similar additions. The Senate bill, for example, includes breaks for NASCAR racetracks and foreign dog-race gamblers, while the House version lavishes its attention upon tobacco growers, timber owners and alcohol distillers. The imminent House-Senate conference, predictably, promises to be a de facto food fight between congressmen, lobbyists and tax watchdogs. And so while the lobbyists duke it out, EU sanctions will continue to rise, and American manufacturers and the U.S. economy will deal with the consequences.
But the real tragedy is the missed opportunity. America’s top corporate tax rate, which stands at 35 percent, is the second highest in the world (Japan is first). Even European welfare states like Sweden and France impose lighter penalties upon their corporations. This disparity puts U.S. companies at a major competitive disadvantage in the world market. And so the $50 billion saved from repealing FSC-ETI, instead of becoming a slush fund for the loudest bidders, could have been used to cut the top corporate tax rate across the board. That simple move would have ended the sanctions, simplified the U.S. corporate tax code, and strengthened U.S. companies worldwide. But instead, what could have been solid, conservative economic policy became an arbitrary auction of taxpayer money.
Nevertheless, increasing European sanctions make the bill’s prompt passage imperative. That such a flawed bill is so essential is a negative reflection on the current state of tax and trade legislation. Players on all sides realize that the legislation has severe shortcomings, and Ways and Means Chairman Bill Thomas has expressed optimism that the bill will be improved in conference. Unfortunately, more bad than good usually happens in conference. We live in hope, but don’t expect a good conference bill.