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| Europe |
| Eurostan’s WTO Hi-jinks to Compel US Tax Rate Reductions? |
| 2004-03-07 |
In the Kafkaesque world of tax law, sometimes a second wrong can produce a right. At least that’s the hope since the European Union decided to impose sanctions on the U.S. for giving tax preferences to exporters after the World Trade Organization repeatedly ruled this out of bounds. Now Congress has a chance to reform tax laws to make U.S. companies more competitive. The tax breaks, now known as the extraterritorial income exclusion, were designed to offset the perverse effects of U.S. high tax rates and system of world-wide taxation--the first wrong. This system handicaps U.S. firms competing against foreign counterparts whose governments tax only their home income. Then came the second wrong. Even though the Europeans themselves rebate value-added taxes on their exports, they decried the U.S. tax breaks as unfair and won their case at the WTO. That decision was disturbing on several levels, not least because it is part and parcel of a wider European effort to stifle tax competition. Nevertheless, the cloud may have a silver lining. The EU sanctions, announced Monday, may help light a fire under U.S. politicians to finally fix a tax code riddled with distortions. The ideal way to deal with this would be a reduction in U.S. corporate tax rates, now some of the highest in the world, and a switch to a territorial or border-adjustable system like most other countries have. Unfortunately, it’s too much to expect Congress to make such a giant leap all at once, especially when a large budget deficit makes it difficult to forgo revenue in the name of longer-term gains. Several bills now under consideration inspire only tepid enthusiasm, but at least they are progress. A Senate Finance Committee bill is less than thrilling, because Chairman Charles Grassley is infused with the spirit of bipartisanship, meaning that the Democrats’ tendency to use the tax code to pick winners and losers has even freer rein. As a result, two of the more ardent tax-cutters on the committee, Senators Jon Kyl and Don Nickles, have broken ranks and proposed a simpler plan that would cut the corporate tax rate. Their demarche may have little chance of passing, but it remains an important marker for the future. The most interesting proposal in the Senate Finance Committee’s bill is a temporary tax break that would give U.S. companies a chance to repatriate at a lower rate their foreign-earned income on which the 35% U.S. corporate tax rate has been deferred. J.P. Morgan estimates this pool of trapped funds at $300 billion, meaning that the government would reap a one-time revenue boost. Democratic presidential candidates have been complaining of late about "loopholes" that allow companies to escape tax by moving their headquarters abroad. But the Kerry campaign in particular has been short on specifics. Perhaps that’s because it is more accurate to say that Washington imposes tax penalties on companies that incorporate in the U.S. That’s why multinationals move out of the U.S. and foreign companies buy U.S. firms. In other words, the law of unintended consequences is at work. A system that was initially designed to discourage firms from moving operations abroad ended up hurting domestic investment. The reality is that even if U.S. multinationals do move some operations overseas, they are still more likely to buy American and invest in the U.S. than foreign firms. Though this lesson should have been learned by now, some may try to demagogue real tax reform as a sop to multinationals shipping jobs out of the U.S. Instead of adding yet more layers of complexity to the tax code and creating more distortions in the name of reducing distortions, Congress now has a chance to take some baby steps toward a simpler regime. Europe’s WTO-approved sanctions, while hard to justify on the merits, may be an important catalyst toward that goal. |
| Posted by:badanov |
| #1 I'm not sure why you posted this Badanov but its an interesting subject. While the USA leads the world in many areas, its taxation system is not one of them. In order to effectively compete in the global market you must have a valued added type tax system such that your imports and exports are treated the same as domestically produced goods and services (both yours and your customers). The rest of the world has figured this out. And while they are unpopular when introduced, people quickly accept because they are easy to understand and administer (assuming you don't have lots of exemtions). They are also very efficient as they are difficult to cheat on. |
| Posted by: Phil B 2004-3-7 9:40:33 PM |