The recently
enacted corporate tax bill has attracted a lot of criticism, but
the legislation actually is rather impressive considering the
political obstacles.
All things considered, it's a case of good, better, best.
Good: The legislation will force the European
Union to eliminate more than $4 billion of taxes on American
exports.
Better: A substantial portion of the bill is
devoted to much-needed tax reforms that will boost U.S.
competitiveness.
Best: These provisions represent another step on
the road to a simple and fair flat tax.
One of the least appreciated aspects of the Bush presidency is that
the tax cuts of the last four years have moved America toward
genuine tax reform, as can be seen by reviewing two of the most
important principles of the flat tax:
First, there should be just one tax rate and it should be very low.
This ensures fairness by treating everyone equally, and it promotes
growth by minimizing the tax burden on productive behavior.
Second, no income should be taxed more than once. This feature
eliminates the bias against saving and investment and ends the
double-taxation of income earned outside U.S. borders.
Based on these two principles, the Bush tax cuts deserve high
grades. The 2001 tax cut, for instance, lowered tax rates and began
the process of repealing one of the worst examples of
double-taxation, the death tax. The 2002 tax cut lowered the
"depreciation" tax penalty on new investment. The 2003 tax cut
accelerated tax rate reductions and substantially lessened the
double taxation of dividends and capital gains. Last, but not
least, the 2004 corporate tax bill reduced the double-taxation of
income earned in other nations.
All of these changes have moved America closer to a flat tax.
Critics will argue that other tax reform principles -- such as
simplicity -- haven't been achieved. This is a fair complaint:
Indeed, it's possible that the tax code is even more complicated
than it was four years ago. That is why President Bush's
endorsement of a tax-reform commission is such encouraging news. A
complete rewrite of the tax law would create an opportunity to
sweep away the junk cluttering the internal revenue code.
This will require politicians to stop using the tax code as a tool
to pick winners and losers. Decades of social engineering and
backdoor industrial policy have resulted in needless complexity.
Even when lawmakers approve good legislation, they cannot resist
the temptation to insert special-interest provisions. The 2004
corporate tax bill is a good example. This legislation included
some very important reforms to boost U.S. competitiveness,
including:
--Reducing the double-taxation of foreign-source income so U.S.
companies are more competitive in global markets.
--Suspending a tax penalty that discourages U.S. companies from
investing overseas profits in America.
--Lowering the tax rate on U.S. manufacturing.
--Putting an end to punitive European taxes on U.S. exports.
Unfortunately, these good provisions are somewhat tarnished since
supporters had to add some "pork" to the bill to attract votes.
This is why the bill included a new deduction for state sales
taxes, a subsidy for bigger state budgets and a step away from tax
reform. Other vote-seeking provisions benefited specific companies
or industries, though it is worth noting that some of these items
actually are good tax policy.
The campaign for good tax policy is further complicated by arcane
budget rules and antiquated revenue-estimating procedures. This is
why there is a complicated and less-than-ideal reduction in the
manufacturing tax burden rather than a much more desirable
across-the-board reduction in the corporate tax rate.
Given all the constraints, it is sometimes amazing that the
political process ever produces any good tax legislation. This is
why it is important to consider the big picture. None of President
Bush's tax cuts have been perfect, either as first proposed or as
ultimately enacted. But each one has taken America in the right
direction. Added together, we are much closer to a flat tax.
Would it be better for America if the President and Congress had
gone with a flat tax instead of enacting four different tax bills
in the last four years? Of course, but the perfect shouldn't be the
enemy of the good. Like sausage-making, the legislative process
isn't a pretty sight. But we shouldn't complain too loudly if the
net result is a better tax code and a more competitive
America.
Daniel J. Mitchell is the McKenna fellow in political
economy at The Heritage Foundation.
First appeared on FOXNews