Editorial: Growth linked to trade and taxes
Protectionism is in fashion this election season. Expect the two presidential candidates when they meet on the debate stage Wednesday night to again battle to establish themselves as the most anti-free trade choice.
It’s an issue that resonates on the campaign trail with voters frustrated by the tepid economic recovery and their eroding buying power. But if it carries over to the next administration, it will distract from attacking the true culprits behind the loss of jobs, income and capital: the corporate income tax.
Trade and taxes are inextricably linked. The next president can help improve the average American’s financial security by reforming the exorbitant corporate tax rate, which pushes companies out of the United States, rather than making it even more difficult for U.S. companies to conduct global business.
“We’re losing our companies because of our tax laws and we’re penalizing exports and preferring imports over exports ... because of our tax laws,” House Speaker Paul Ryan told The Detroit News during a recent visit to Michigan.
The right reforms could be a huge boon for states like Michigan that rely heavily on trade and manufacturing.
At an effective rate of 39 percent, the U.S. corporate tax is the highest in the developed world — far higher than the 24.6 percent average of nations included in the Organization for Economic Co-operation and Development (OECD).
That has led to a continual decline in the number of companies headquartered in the U.S. They leave for countries that don’t tax foreign earnings — the U.S. is one of only two countries to do so — and that have lower tax rates. In fact, 28 percent fewer companies were headquartered in the U.S. in 2014 than in 2000, according to the Global Fortune 500.
An Ernst & Young report contends that had the corporate tax rate been cut to 25 percent, it would have kept 1,300 companies in the U.S. over the past decade.
It also would have allowed the U.S. to acquire $590 billion in cross-border assets from mergers and acquisitions over the past 10 years instead of losing $179 billion in assets — a $769 billion difference.
That loss of capital may seem invisible, but the effects are not.
Reducing the tax rate would keep companies in the U.S., while ending the double taxation on overseas earnings would bring capital back to the United States. An estimated $2 trillion in earnings by U.S. companies is waiting to be repatriated, if the tax code is fixed. Imagine if that money were here, going into research and development operations and increasing manufacturing output. That means more jobs and tax revenue.
Instead of embracing such responsible reforms, Republican Donald Trump would tax imports from some of the United States’ biggest trading partners, including China and Mexico, at 45 percent. That’s absurd, and would stifle the work of key Michigan employers: Detroit’s Big Three automakers.
Democrat Hillary Clinton would impose what she calls an “exit tax” on companies that relocate overseas, instead of fixing the underlying problem of high corporate taxes.
Both candidates’ remedy is to punish companies for doing what they have to do to survive in a global economy. The better answer is to make America more competitive.
Whoever wins the presidency will have to pivot back to rationality on a number of positions they struck on the campaign trail. Trade and corporate taxes should be first among them.