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July 19, 2007
Taxes and economic prosperity
Next week, Treasury Secretary Paulson is hosting a conference on business taxes and competitiveness. In today's Wall Street Journal, he laid out the opening position in an op-ed piece Our Broken Corporate Tax Code. There is a thread to the Secretary's argument I very much agree with -- the complexity of the tax code:
Targeted provisions to encourage specific activity substantially narrow the tax base and thus, overall tax rates must be higher. And these provisions add complexity; some have estimated that businesses spend $40 billion annually on tax compliance costs -- $40 billion that could create jobs, provide greater employee benefits and generate economic growth. Even the opportunity for favorable tax treatment gives rise to corporate expenditures on lobbying, rather than on growth creation.
He also points out a specific concern of mine:
The current tax depreciation system does not treat investments uniformly; depreciation allowances vary without clear economic rationale. This can bias decision making and result in a direct misallocation of capital if firms make marginal investment choices based on taxation rather than innovation.
I have long argued that contrary to what some laissez faire analysts say, the US has an industrial policy: the tax code. And it is one of the worse types of industrial policies: non-transparent and not subject to any periodic review. Our treatment of intangibles is a case in point. I have not done a systematic study of depreciation rates -- but the mere fact that investment in intangibles such as product development and worker skills (training) are treated as an immediate expenses rather than depreciable investments has got to result in misallocation of capital.
However, there is an overriding theme to the Secretary's message: cut the corporate tax rate:
A study by Treasury economists estimated that a country with a tax rate one percentage point lower than another country's attracts 3% more capital. It's not surprising then, that average OECD corporate tax rates have trended steadily downward.
Now, I'm not a tax expert. But I am not convinced that problem is simply our tax rate, although I am willing to accept that the rate is worth looking at. There is a lively debate over the Scandinavian model with a combination of high personal income tax rates and low corporate rates. Nor is it just our corporate taxes. All of our regressive employment taxes, especially as they end up being applied to the self-employed, need careful examination.
Secretary Paulson is absolutely right: we need a new tax system for the I-Cubed Economy. However, the focus shouldn't be on tax rates but on the overall structure of the tax system -- including the recommendations of the President's Advisory Panel on Federal Tax Reform (commonly known as the Mack-Breaux Tax Reform Commission) (see my earlier posting).
Posted by Ken Jarboe at July 19, 2007 11:26 AM
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Tracked on July 27, 2007 10:42 AM