Tax reform should aim for biggest corporate cuts possible. | Plus: corporate tax burden, tax code restrictions, net neutrality.

December 16, 2017 Cutting corporate rates as much as possible should be the priority of tax reform. Who pays the corporate tax? Workers do. The income tax code currently contains 50,000 restrictions. Net neutrality rules—the ones that were just repealed—didn't make the Internet neutral. Would grocery story neutrality make grocery stores better? Giving back rate cuts is a mistake. Ike Brannon reports that the "recently concluded tax reform conference report draft includes a one-percentage-point increase in the corporate tax rate above what both the House and the Senate passed," which he calls a mistake: What hasn't changed over the last thirty years? The corporate tax rate. A mere one point increase in 1993 marks its only alteration since the 1986 reform. In the context of our government's predilection to conduct a wide manner of economic policy through taxes, its stickiness is remarkable. We suspect the durability of the corporate tax rate owes to the fact that the benefits to reducing the rate can be difficult for voters to comprehend. Opponents of tax reform can simply shout that it is nothing but a giveaway to big business and that has often proven to be enough to get congressmen to back away. Of course, it is anything but a giveaway. During the three decades of U.S. corporate tax rate stasis, literally every country in the OECD has reduced its tax rate numerous times. In 1987 we had one of the lowest corporate tax rates amongst the group, but today we have the highest by far, which has made it more difficult for U.S. companies to compete against their foreign competitors. From 2000-2012, there were 85 different corporate rate tax reductions in the OECD, I found. The high U.S. corporate tax rate is especially pernicious, because it is a lousy way to collect tax revenue. Since a good fraction of it is borne by the workers in the form of lower wages, it's not nearly as progressive as most people assume, and it achieves that progressivity at an extremely high opportunity cost in terms of foregone economic growth. Nobel Laureate Robert Lucas once said that eliminating the corporate tax was the closest thing to a free lunch that he has ever observed in economics. History has shown that many other changes in the tax reform plan may be unwound in the near future, no matter what the final legislation contains. For better or worse, Congress cannot tie the hands of a future congress. But whatever happens with the corporate tax rate in the final bill will likely remain the law for the foreseeable future, so above all else we should strive to get it right. And the right rate is the lowest rate possible. [Cato Institute]   Workers pay the corporate tax. The idea that cutting corporate tax rates won't help anybody except rich people is one of the biggest myths in the debate over tax reform. Adam Michel and Rachel Greszler debunk it: Despite the name—"corporate" tax reform—the burden of the corporate income tax falls almost entirely on workers in the form of lower wages. Americans are undoubtedly skeptical about this claim, but the realities on the ground are actually quite simple. When business taxes go down, workers' wages go up. That's not just the result of corporate benevolence. Rather, wages rise because higher profits translate to additional investments that make workers more productive, and businesses that don't pay workers what they are worth will lose them to competitors who do. American corporations pay a federal income tax rate of 35 percent—one of the highest in the world. If tax reform can lower that rate to 21 percent, American businesses and the workers they employ will be globally competitive again. Businesses will invest more, hire more workers, and be forced by the laws of supply and demand to raise wages. This is exactly what happened over the past decade and a half in neighboring Canada. In 2007, Canada began lowering its corporate tax rate. And guess what? Wages grew significantly faster in Canada than other comparable countries. Most economic researchers agree. A recent review of 10 separate studies published between 2007 and 2015 concluded that when governments cut corporate taxes, workers receive almost all of the benefit through higher wages. [The Daily Signal]   The income tax code contains 50,000 restrictions. The chart below shows the number of restrictive words (like "must" or "shall") in Internal Revenue Service regulations (Title 26 of the Code of Federal Regulations). The dark blue area shows the number of restrictive words in part 1 of Title 26—the regulations pertaining to federal income taxes. Clearly that number has gotten larger since the 1980s. Patrick McLaughlin, Stephen Strosko, and Andrew DeJoy write: With 8,985,439 words and 50,589 restrictions […] Part 1 of Title 26 is the longest and most restrictive single part in the entire CFR. Part 63 of Title 40, which covers national air pollution regulation, is the next largest, with 3,032,623 words and 41,573 restrictions. How long and complex are nine million words of tax-related regulatory text? For context, the King James Version of the Bible contains 792,074 words, which means that Part 1 of Title 26 is almost 11.5 times as long as the Bible itself. According to the IRS, in 2016, the average taxpayer with no business income required nine hours to comply with individual income tax requirements. In the digital age, why does a modern, advanced economy need 11.5 times more words than the Bible, forcing average taxpayers to spend more than an entire business day to file their tax returns, to accomplish what could be done in five minutes? [Mercatus Center]   The net neutrality rules that were just repealed this week didn't actually do what it's advocates claimed they did. Andrea O'Sullivan explains: Simply stated, the [Open Internet Order] does not in fact secure the principles of "net neutrality" […] . In fact, the OIO may have the adverse effect of actively discouraging the principles of net neutrality through a loophole that would exempt motivated Internet Service Providers (ISPs) from OIO regulations. This cannot be emphasized enough: The OIO allows and encourages ISP filtering, a huge no-no in the world of net neutrality. […] How? The original OIO language attempted to deal with any First Amendment objections to the new FCC regulations by differentiating between platforms that engage in "editorial intervention" versus those that are mere conduits for speech, such as most ISPs. But this created a problem because some ISPs do engage in editorial curation—specifically, religion-oriented ISPs that filter out content objectionable to certain faiths. In 2016, the US Court of Appeals crystallized this loophole in its interpretation upholding the OIO, which noted that ISPs that explicitly offer "'edited' services" to its customers would not become subject to the OIO. In other words: Tell your customers that you filter content, and you're free from the shackles of the FCC! […] This comedy of errors has resulted in a situation where the OIO is untenable for both true net neutrality advocates and net neutrality skeptics like myself. On the one hand, as discussed, the OIO explicitly violates the principles that many net neutrality activists hold dear. On the other hand, the OIO erects a major new permissioned regime that threatens to stifle internet innovation and favor certain firms and industries over others. In particular, the OIO employs a vague "general conduct standard" that could prompt regulators to clamp down on any online activity that they don't like. This kind of catch-all "standard to rule them all" could further frustrate the stated aims of net neutrality advocates. [Reason]   Why not grocery store neutrality? Jessica Melugin: What if the federal government forced grocery stores to carry every conceivable food item? Grocery stores have strong incentive to give their shoppers as many choices as possible. If a store chooses not to sell a product, it risks losing customers to competitors that carry that product. Broadband providers operate under the same restraint. They have every incentive to offer their customers maximum access to the Internet's sites and services. Some net neutrality proponents oppose allowing broadband companies to develop and then favor their own content, even though this is akin to supermarkets giving their own store-brand products valuable shelf space alongside recognized national brands. American consumers experience vast and expanding choice at their grocery stores without federal mandates. There's no reason to believe market forces wouldn't deliver the same results online. [USA Today] The Heritage Foundation 214 Massachusetts Avenue, NE Washington, DC 20002 (800) 546-2843 Add info@heritage.org to your address book to ensure that you receive emails from us. You are subscribed to this newsletter as johnmhames@comcast.net. If you want to receive other Heritage Foundation newsletters, or opt out of this newsletter, please click here to update your subscription.

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