Taxation and growth - CE Roundtable - Panel Discussion

Chief Executive, The, June, 1992

Traditionally, taxation has been the payment made to government for "servitude rendered," but in a global economy, capital and knowledge move to wherever they are treated best. Some in government are beginning to understand this.

The recession that's drawing to a close was prolonged by several factors, among them a 1992 deficit of $400 billion. But the government officials and business leaders assembled at The Ritz-Carlton hotel in Washington for this month's CE roundtable say another culprit was the US. tax system. Both the degree and method of taxation demonstrably penalizes growth and inhibits the international competitiveness of American companies.

On the surface, U.S. companies and citizens bear a smaller tax burden than their European or Asian counterparts, with the exception of those in Hong Kong and Singapore. Taxes here claim between 32 and 35 Percent of personal income, compared with an average 40 percent in Europe. Corporate rates also are higher in some foreign countries (see chart on page 50). But statutory rates are only one element of the total costs borne by ratepayers. While other nations tend to tax corporate profits once, the U.S. taxes them again when they are distributed as dividends. This raises capital costs and leads to a bias toward debt over equity.

The rising level of state and local corporate income and payroll taxes, usually not tracked in comparisons by the Organization for Economic Cooperation and Development, has become the largest part of the corporate tax burden. But one barometer is a comparison of corporate taxes and profits. A Tax Foundation study last year revealed that in 1980, profits made up 10.8 percent of national income. But that figure dropped to 6.3 percent by 1990. Total corporate taxes, however, did not experience a comparable decline. Relative to Profits, taxes increased 28.1 percentage points from 58.9 percent in 1980 to 87 percent in 1990. During the 1970s, this rate averaged only 60 percent.

Hidden in the U.S. system, observes James Q. Riordan, CEO of Bekaert and former Mobil vice chairman, is a heavy compliance burden. At Mobil, where be was CFO, hundreds of tax accountants, attorneys and other professionals maintained compliance with intricate U.S. law, Riordan says. At foreign subsidiaries, only a handful of such people were required. Nor does the foreign tax credit allow US. companies to capture full credit for taxes paid elsewhere. Steve Perry, Coopers & Lybrand international tax partner-in-charge, thinks the compliance cost differential between U.S. and EC internationals can be significant. "One EC company we do work for employs at its headquarters only 25 percent of the tax-related personnel which its U.S. subsidiary needs to maintain compliance," he says.

This is not an efficient way to collect revenue. A study by Washington University's Center for the Study of American Business estimates that it costs the federal government $1.52 for every $1 it collects from citizens. Roundtable attendees such as House Ways and Means Committee member Sam M. Gibbons and ranking Republican Bill Archer advocate replacing corporate and personal income taxes with a 25 percent value-added tax, structured not to shift the tax burden but to reduce the costs of collection and compliance.

All agree with The Heritage Foundation's Ed Feulner that before any VAT is considered, two issues must be resolved: Because VAT is a relentlessly efficient revenue raiser, government must set an absolute rate ceiling to deter spending excesses. Also, VAT should replace other taxes and not add to the national tax burden.

Jim Miller, co-chairman of the Tax Foundation and director of the Office of Management and Budget from 1985-88, believes tax reform should begin with a cut in the capital gains tax, which currently stands at 28 percent. Such a move, be says, would help to modify a system that penalizes capital and rewards consumption.

President Bush, too, favors trimming the capital gains tax, but he has given broader tax reform a low priority. Lack of leadership from the White House prompted Ways and Means Committee Chairman Dan Rostenkowski to lament in a recent interview with CE (see cover story), "You won't see any radical change in our tax laws - to a consumption tax-unless the president forcefully endorses it. "

MOTORING DOWN THE ROAD

James C. Miller III (Tax Foundation): Many economists and politicians say that we have to jump start the economy, but I don't think that's an appropriate metaphor. Our car doesn't need a jump start. It's moving, but sluggishly. It's not gaining speed, and it can't maneuver very well.

And this sluggishness is caused by excess baggage, labeled government spending, over-regulation and monetary policy. But another bag - as large as any - is labeled taxation. We need to get rid of our excess baggage to make our car lighter and more maneuverable.

Spending and taxation are closely related. I think it would be a mistake to use tax cuts to stimulate aggregate demand. There are more appropriate ways of addressing shortcomings in demand. I also think it would be a mistake to formulate tax policy based on "fairness." I think if we aim to create "fair" tax policy, we're bound to get bad tax policy.