Tag: Kevin Brady

Cut the Corporate Tax Rate; Drop the BAT.

We will never achieve a good tax reform by trusting bad revenue estimates.

According to Wall Street Journal reporter Richard Rubin, “Each percentage-point reduction in the 35% corporate tax rate cuts federal revenue by about $100 billion over a decade, and independent analyses show economic growth can’t cover all the costs of rate cuts.”

Economic growth does not have to “cover all the cost” to make that $100 billion-per-point rule of thumb almost all wrong.  If extra growth covered only 70% the cost of a lower rate, the static estimates would be 70% wrong.  Yet the other 30% would be wrong too, because it ignores reduced tax avoidance.  Mr. Rubin’s bookkeepers’’ rule-of-thumb implicitly assumes zero “elasticity” of reported taxable profits. Corporations supposedly make no more effort to avoid a 35% tax than to avoid a 25% tax.

Acceptance of this simplistic thumb rule – which imagines a 35% corporate rate could raise $1 trillion more over a decade than a 25% rate – explains why Ways and Means Committee Chairman Kevin Brady still insists a big new import tax is needed to “pay for” a lower corporate tax rate. 

In this view, a border adjustment tax (BAT) is depicted as a tax increase for some companies to offset a tax cut for others.  No wonder the idea has been ruinously divisive – with major exporters lobbying hard for a BAT and major retailers, refiners and automakers vehemently opposed.  Mr. Rubin declares the BAT “dead or on political life support,” while nevertheless accepting that it would and should raise an extra $1 trillion over a decade – assuming no harm to the economy and no effect on trade deficits.

Like Mr. Rubin, Reuters claims “Trump could have trouble getting the rate much below 30 percent without border adjustability.”  That is false even on its own terms because the Ryan-Brady plan would eliminate deductibility of interest expense, which is enough to “pay for” cutting the rate to 25% on a static basis.  Adding a BAT appears to cut the rate further to 20%, but the effective Ryan-Brady rate is really closer to 25% because the import tax and lost interest deduction are not a free lunch.

In any case, the entire premise is wrong. There is no need to “pay for” cutting a 35% corporate “much below 30 percent” because nearly every major country has already done that and ended up with far more corporate tax revenue than the U.S. collects with its 35% tax.  

The average OECD corporate tax rate has been near 25% since 2008, and revenue from that tax averaged 2.9% of GDP.  The U.S. federal tax rate is 35% and revenue averaged just 1.9% of GDP.  Ireland’s 12.5% corporate rate, by contrast, brought in 2.4% of GDP from 2008 to 2015.

Sweden cut the corporate tax rate from 28% to 22% since 2013 and corporate tax revenues rose from 2.6% of GDP in 2012 to 3% in 2015 according to the OECD. Britain’s new 20% corporate tax in 2015 brought in 2.5% of GDP according the same source, unchanged from 2013 when the rate was 23%. 

House Republican Health Plan Might Provide Even Worse Coverage For The Sick Than ObamaCare

WASHINGTON, DC - JUNE 22: House Speaker Paul Ryan (R-WI) discusses the release of the House Republican plank on health care reform at The American Enterprise Institute for Public Policy Research on June 22, 2016 in Washington, DC. (Photo by Allison Shelley/Getty Images)

After six-plus years, congressional Republicans have finally offered an ObamaCare-replacement plan. They should have taken longer. Perhaps we should not be surprised that House Republican leaders* who have thrown their support behind a presidential candidate who praises single-payer and ObamaCare’s individual mandate would not even realize that the plan cobbled together is just ObamaCare-lite. Don’t get me wrong. The plan is not all bad. Where it matters most, however, House Republicans would repeal ObamaCare only to replace it with slightly modified versions of that law’s worst provisions.

Here are some of ObamaCare’s core private-health insurance provisions that the House Republicans’ plan would retain or mimic.

  1. ObamaCare offers refundable health-insurance tax credits to low- and middle-income taxpayers who don’t have access to qualified coverage from an employer, don’t qualify for Medicare or Medicaid, and who purchase health insurance through an Exchange. House Republicans would retain these tax credits. They would still only be available to people ineligible for qualified employer coverage, Medicare, or Medicaid. But Republicans would offer them to everyone, regardless of income or where they purchase coverage.
  2. These expanded tax credits would therefore preserve much of ObamaCare’s new spending. The refundable part of “refundable tax credits” means that if you’re eligible for a tax credit that exceeds your income-tax liability, the government cuts you a check. That’s spending, not tax reduction. ObamaCare’s so-called “tax credits” spend $4 for every $1 of tax cuts. House Republicans know they are creating (preserving?) entitlement spending because they say things like, “this new payment would not be allowed to pay for abortion coverage or services,” and “Robust verification methods would be put in place to protect taxpayer dollars and quickly resolve any inconsistencies that occur,” and that their subsidies don’t grow as rapidly as the Democrats’ subsidies do. Maybe not, but they do something that Democrats’ subsidies don’t: give a bipartisan imprimatur to ObamaCare’s redistribution of income.
  3. As I have tried to warn Republicans before, these and all health-insurance tax credits are indistinguishable from an individual mandate.  Under either a tax credit or a mandate, the government requires you to buy health insurance or to pay more money to the IRS. John Goodman, the dean of conservative health policy wonks, supports health-insurance tax credits and calls them “a financial mandate.” Supporters protest that a mandate is a tax increase while credits—or at least, the non-refundable portion—are a tax cut. But that’s illusory. True, the credit may reduce the recipient’s tax liability. But it does nothing to reduce the overall tax burden imposed by the federal government, which is determined by how much the government spends. And wouldn’t you know, the refundable portion of the credit increases the overall tax burden because it increases government spending, which Congress ultimately must finance with additional taxes. So refundable tax credits do increase taxes, just like a mandate.

Thursday Links

  • DON’T FORGET: Our fiscal policy conference, “The Economic Impact of Government Spending,” featuring Senators Bob Corker (R-Tenn.) and Mike Lee (R-Utah), former Senator Phil Gramm (R-Tex.), Representative Kevin Brady (R-Tex.), and other distinguished guests, begins at 2:00 p.m. Eastern today. Please join us on the web–you can watch the conference LIVE here.
  • Atlas Shrugged Motors presents the Chevy Volt.
  • The parable of the Good Samaritan teaches us about the moral value of voluntary charity toward the needy–it says nothing about using coercive government programs of the modern welfare state.
  • It is not the role of the Court to rewrite laws for Congress.
  • The failed “war on drugs” has reshaped our budgets, politics, laws, and society–and for what?

Wednesday Links

  • Please join us on Thursday, April 7 at 2:00 p.m. ET for “The Economic Impact of Government Spending,” featuring Sen. Bob Corker (R-TN), Sen. Mike Lee (R-UT), Rep. Kevin Brady (R-TX), former Sen. Phil Gramm, former IMF director of fiscal affairs department Vito Tanzi, and Ohio University economist and AEI adjunct scholar Richard Vedder. We encourage you to attend in person, but if you cannot, you can tune in online at our new live events hub.
  • The last time we saw a green energy economy was in the 13th century.
  • This isn’t quite what we meant by “defense spending.” For a refresher, see this itemized list of proposed cuts that could save taxpayers $150 billion annually.
  • Prosperity reigns where taxes are low and right to work prevails.”
  • In case you missed it last Friday, check out Cato director of financial regulation studies Mark A. Calabria discussing the Federal Reserve on FOX News’s Glenn Beck show:


Rep. Brady’s CUTS Act

Rep. Kevin Brady (R-TX) has introduced the Cut Unsustainable and Top-heavy Spending Act, which would cut spending by $44 billion annually.  Brady’s effort moves in the right direction but it is a very modest fiscal reform effort.

The legislation, which Brady calls a “down payment on getting America’s financial books in order,” chooses targets that have already been proposed by the Obama administration or the president’s Fiscal Commission. Therefore, the proposal should have bipartisan appeal. For example, Brady’s bill would cut Pentagon spending and eliminate subsidies to the Corporation for Public Broadcasting.

Many of the targets represent “house cleaning cuts” that would reduce spending on bureaucratic activities such as printing and federal travel. The legislation would also reduce the federal workforce by 10 percent per the Fiscal Commission’s recommendation. While there’s nothing wrong with a little house cleaning, these types of cuts would occur on their own if entire government agencies and programs were eliminated.

Eliminating federal agencies and programs should be the ultimate goal. Annual savings of $44 billion only amounts to about 3 percent of the project budget deficit this year, and less than 10 percent of the annual amount needed to be cut to stabilize the debt by 2020. (See this Cato spending cut plan for more details on what is needed to get our budgetary situation under control.)