Out of Control Policy Blog

What Works in the Deficit Reform Proposals?

If you've struggled to wade through the intricacies of the different budget reform plans making their way through Beltway wonkdom, you're probably not alone. Late last month, the WaPo offered some (mostly progressive) commentators a chance to point out their favorite elements of various deficit-reduction proposals, with some interesting results.

Douglas Holtz-Eakin, while hitting the well-worn point about the anti-competitive level of the U.S. corporate income tax, also touches on an important but oft ignored factor: tax territoriality.

Having the highest [corporate tax] rate is merely disastrous. Even worse, the United States clings illogically to an outmoded system of "worldwide taxation" that every other country has abandoned. The stakes are enormous. Under a worldwide system our firms competing in, say, Brazil are liable for Brazilian and U.S. taxes. A German or Chinese competitor is subject to only the "territory's" taxes - in this case, Brazil's - giving them an advantage over U.S. firms in international competition for 95 percent of the world's consumers.

Indeed, a territorial tax system would not only simplify tax compliance for U.S. businesses operating abroad, but allow them to reinvest more of their profits both at home and abroad, creating more wealth for their American shareholders.

It's also encouraging to see Robert Reichshauer and Mark Zandi laud the Bowles-Simpson and Dominici-Rivlin plans for axing tax expenditures like the mortgage interest deduction while lowering marginal rates. Though they repeat the odious progressive argument that tax deductions and credits "cost" the government money, they correctly note the economically harmful effects (driving up costs/prices for goods the government wants you to buy) and the regressivity of these policies.

Though there is sure to be disagreement over how much marginal rates should be lowered and which expenditures should be killed, commentaries like these indicate the coming debate over tax reform could see some serious compromise between fiscal conservatives and progressives. That, ultimately, is not something to be scoffed at.

David Godow is Research Assistant


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