- - Thursday, May 25, 2017

ANALYSIS/OPINION:

Lobbyists are out in full force to block genuine tax reform. If Congress bends, great harm will come to ordinary folk — fewer good-paying jobs and a federal government too strapped to care for seniors and the truly needy.

Currently, corporate profits above $75,000 are taxed at least 34 percent. That’s a low threshold for such a hefty bite, but a myriad of special credits, exemptions and deductions often limit the taxes actually paid.

Special breaks tend to go to big multinationals with outsized lobbying budgets, whereas domestic manufacturers that compete with imports often face large tax bills. That swells the trade deficit, shutters factories and contributes to the degradation of communities that voted for President Trump.

Other industrialized economies have been cutting corporate rates, placing U.S. businesses at a competitive disadvantage. Studies conducted by the European Commission, University of Calgary and World Bank indicate the U.S. effective rate is about 30 percent, while the average abroad is less than 20 percent.

Such a burdensome tax on capital encourages American multinationals to keep here activities that qualify for loopholes but move to China, Mexico and Europe manufacturing, supply chain management and R&D.

That’s an important reason why American colleges of engineering are full of foreign students. Careers in applied sciences don’t pay well enough to encourage our brightest young people to bear the costs and rigors of an undergraduate engineering curriculum. Corporate finance is easier, and Wall Street pays better.

Jettisoning special breaks to lower tax rates without reducing revenue collected would encourage businesses to spend less on tax dodges and lawyers who dream up those schemes, and to invest more in sound projects that create good jobs, higher wages and taxes to finance our government.

Still, that would not fix the higher overall corporate tax burden in the United States. That requires, among other things, border tax adjustments (BTAs). Those would forgive taxes on exports and apply them to imports — a practice followed by competitors who rely more on value-added taxes.

As imports exceed exports, BTAs along with some other moves to ensure World Trade Organization compliance, would create enough additional revenue to lower the top marginal rate to about 20 percent and make the United States a reasonably attractive location to do business.

Most small businesses and some surprisingly large companies, including Bechtel and Chrysler, are organized as Limited Liability Corporations and similar entities. Those file through the personal income tax system, which imposes even higher marginal rates than the corporate system.

Applying a lowered corporate rate to those businesses and cutting middle-class taxes are fanciful ideas floated by Treasury Secretary Steven Mnuchin that the country simply cannot afford. By 2027, entitlements and interest payments are on track to consume virtually all federal tax revenue. Then foreign creditors would not be as likely to lend to Uncle Sam as readily as today, and a Greek-style meltdown cannot be ruled out.

Without entitlement reform there can be no significant tax relief.

Shifting more of the tax burden to upper-income families is virtually impossible. Some 45 percent of Americans pay no income taxes and the top 20 percent of filers already pay 87 percent of personal income taxes.

Implementing BTAs, and getting rid of special corporate tax breaks, abuses of entitlements — such as free health care and food stamps for able-bodied adults who refuse to work and juicy personal deductions like those for mortgage interest and state and local taxes — are the only path to lower corporate and personal tax rates that makes both competitive and fiscal sense.

Koch industries and big retailers like Wal-Mart oppose BTAs, big oil would welcome an end to the depletion allowance as cheerfully as it would solar-powered cars, realtors and home builders may be expected to defend the mortgage interest deduction like mothers do newborns, and liberals would frame ending federal tax subsidies to big-spending jurisdictions like New York and California as a direct assault on progressively thinking mayors and governors.

To break out of the doldrums of 2 percent growth, cynical agendas must be confronted. Otherwise vast regions of the country hit by factory closures will remain depressed, middle- and working-class incomes will continue to stagnate, federal finances will collapse, and America will cede global leadership to nations friendlier to progress and growth.

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


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