When tax reform is discussed, it is usually in terms of who
gets a new tax cut and who loses a tax subsidy. This time around, individual
taxes are (sort of) on the table. Looked at from an isolationist viewpoint,
both individual and corporate taxes should be susceptible to increase or
decrease going into the negotiation, as the end-goal in any tax reform debate in
the US at this point, should be to increase revenue. But more realistically, in
a globalized world only one of the two tax bases are mobile.
With that guiding principle, an ideal tax reform proposal
should include both individual and corporate tax rates being realigned with the
times. No politician wants to stand on the platform of higher taxes, so maybe
America’s first non-politician president might want to give it a try. Point
blank, individual tax rates in this country need to go up. Yes, people will complain,
but the ones that use more of the services will be right here paying their
taxes. Corporate tax rates on the other hand need to be lowered to bring them
in line with other developed economies. The goal is to incentivize
multinational and international businesses to setup shop in the US. An ideal
outcome would be to see a reversal of the corporate tax inversion trend in the
US, and eventually to see foreign companies inverting to be domiciled in the
US.
The primary objective of corporate tax policy in the US is
to drive private sector spending of cash that would otherwise be held and/or
spent outside the country. To do this, companies need to be incentivized, and
the path of least resistance for spending and investing for large multinational
companies is the lowest tax rate jurisdiction. The potential for a net
shortfall in corporate tax revenue should be outweighed by the potential social
benefit of a sustained increase in both domestic and foreign corporate spending
within the United States. Paired with an increase in individual income tax
revenue, the social benefit from increased private sector spending should put
marginally less strain on the Federal government budget.
Of course, no conversation about US tax reform is complete
without at minimum a mention of entitlement spending. Lowing corporate tax
rates and even increasing individual tax rates short of draconian levels will
at best have a marginal effect on the overall fiscal position of the US Federal
government. Real, tangible efficacy does not come into play until you start
pairing net tax rate increases with decreases in entitlement spending. Not just
cosmetic cuts, but deep slashes in social security and medicare spending. The
burden will inevitably fall onto the states which would have to in-turn increase
tax rates to cover the additional costs of providing social safety nets.
Private sector spending in increasing productivity needs to
be met with a better educated, more flexible workforce. Which again the burden
falls on the Federal and state governments to bolster the education system.
There aren’t two ways about it, tax rates need to be increased in the United
States. Of tax rates in general, individual tax rates need to be increased on a
disproportionate scale to corporate tax rates, which need to be decreased to become
more competitive on a globalized stage. This is a tall order for even the most agile,
and well-versed politician, damn near impossible for someone relying on
on-the-job-training. On the other hand, maybe this is the one time in American
political history that the motives of a self-serving businessman align with
what is best for the country. After-all, despite being the richest person to
every run for President of the United States, Donald Trump managed to be most
relatable to some of the poorer parts of American society. Good luck Mr.
President.
