Tax reform would enhance growth, protect American jobs
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There are four essential keys to economic growth — a reliable legal system (property rights), a stable currency, a developed financial system and a rational tax system. 

During the Cold War era, the United States was one of the few countries that could claim all four. Even if the tax code was not perfect here, it was superior to most of the rest of the world that operated in closed economies. 

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Over time, other countries adopted capitalist economies that offered business-friendly environments like the U.S. and today, unlike during the Cold War, many countries’ tax systems are far more advantageous for businesses.

As a result, the competitive advantage that the U.S. once had in attracting businesses has evaporated. Now, America lives under an anachronistic tax code that must be updated in order to compete internationally. 

It is critical for the future of the U.S. economy that it reform its tax code in the immediate term, or business will continue to be driven away, along with American jobs.

In considering corporate tax reform legislation, lawmakers should follow three guiding principles — make it more attractive for companies to locate here; write a tax code that does not incentivize firms to arbitrage the tax code, but instead make decisions on a rational, economic basis; make it benefit capital and labor equally. 

Tax policy is not merely an exercise in collecting revenues for the Treasury. The tax code needs to be written in a way that does not distort economic decision-making. 

It is human nature to want to pay as little tax as possible; firms will always look for different ways to minimize their tax bill. 

Congress needs to write a tax code that neither drives firms (aka “employers”) offshore nor gives firms reasons and means to game the tax code.  

Lowering the corporate tax rate will end an unintended policy of driving American firms to low-tax countries.

A simpler tax code will reduce the incentive for firms to make business decisions based merely on the tax code rather than rational economic thinking. 

The third principle might seem to be the most difficult to obey, but it is in the best interest for both parties to follow.

In this populist era, Democrats often attack capital and promote labor. However, this position runs counter to their stated position of promoting labor.

By incentivizing U.S. firms to move to low-tax jurisdictions, the tax code perversely reduces the demand of American workers.

Furthermore, the current tax code reduces the revenue collected under the corporate tax code and winds up shifting the burden for tax revenue to the individual and labor. 

Lawmakers should write a tax code that increases the number of corporations and businesses in the U.S., which would then increase the number of taxpayers under the corporate tax code and reduce the burden on the individual side of the tax code.

The United States is at a critical and unprecedented period in its history. As the world has become more capitalist and business friendly, the U.S. faces competitive pressures that we used to take for granted. 

At the same time, partisanship seems to be at an all-time high. Ironically, the interests of the two parties might be aligned in ways that are underappreciated. 

Republicans want to help businesses in corporate tax reform, but this can be done in a way that is both pro-capital and pro-labor, thus making tax reform attractive to Democrats as well. 

The challenge now is to show lawmakers in both parties that their political interests are aligned and that tax reform is a win-win proposition rather than a zero-sum game.

 

Brian Gardner is managing director and Head of Washington Research at Keefe, Bruyette & Woods, Inc. (“KBWI”), a wholly owned subsidiary of Stifel Financial Corp.  KBWI is a registered with the United States Securities and Exchange Commission and a member of the New York Stock Exchange and Financial Industry Regulatory Authority, Inc. The views and opinions expressed in this article are those of the author and do not reflect those of Keefe, Bruyette & Woods, Inc., Stifel Financial Corp, its employees, or its management.


 

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