Paul L. Caron

Saturday, February 25, 2012

The Economist: Tax Reform -- The Devil's in the Details (and the Politics)

The Economist, Tax Reform: The Devil's in the Details (and the Politics):

EconomistLike the weather, American politicians talk a lot about tax reform but do nothing about it. Which is a pity, because while Americans have been talking, other countries have been doing; since the late 1980s, top corporate tax rates around the world have dropped to a point that America’s, once below the international average, is now well above.

As this has happened, American-based multinational companies have shifted more activity offshore; their foreign employment steadily rose over the last decade as domestic employment fell. This is mostly because of the appeal of cheap labour and growing markets in the emerging world, but business groups and many economists think America’s tax rate is also to blame. Liberal analysts blame the tax code for a different reason: it allows multinationals to stash income in foreign havens and indefinitely defer taxes on it, encouraging the outsourcing of jobs.

Barack Obama claims to be ready to do something about it. ... Mr Obama’s proposal is better than what America already has, but not by much. His well-intentioned goal of broadening the tax base is betrayed by the preferences he insists on maintaining for manufacturing and “green” energy whose economic merits have been questioned, even by former members of his own administration. By maintaining many of the current tax breaks but apportioning them more variably, the tax code would become more complex rather than less so.

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Interesting - of course there is also the issue of fiscal sustainability, it's fine to lower taxes, but you also need to reduce spending, or rearrange the taxes. In a world where inflation is controlled by the central bank, and realistically employment is the domain of the government, you have tied hands at the moment. But that corporate tax rate is something to keep an eye on...

Posted by: Central Bank News | Feb 25, 2012 7:49:53 PM