Capital Punishment

Article excerpt

Capital Punishment The Benefit and the Burden: Tax Reform, Why We Need It, and What It Will Take, Bruce Bartlett, Simon & Schuster, 271 pages

In his new work, Bruce Bartlettone of the original supply-side economists - makes a cogent case for restructuring our tax system. His premise is exactly right: "The goal of tax reform, which Republicans used to believe in, should be tax neutrality." Given how high our debt levels are, any new system has to be revenue-neutral. But the right kind of reform, Bartlett maintains, should have "the lowest possible rates on the broadest possible base." America would be better off with a system that emphasizes taxing consumption rather than one that heavily taxes capital investment.

The United States has me most onerous corporate tax system in the world, with its 35 percent and the 7.65 percent employer portion of the payroU tax. In hght of that, it's not surprising there was a net loss of 3.7 million private-sector jobs in the U.S. from 2000 through 2010. During that decade the only gain in employment came from growth Ui government jobs.

Our current system is an example of "upside-down economics." We reward corporate debt while punitively taxing capital investment, employment, and savings - die engines of growtii. As investment guru Mark Faber has observed, "The government continuously implemented pohcies to boost consumption when everyone should know that an economy will grow in a sustained way only tiirough the implementation of policies that foster capital formation."

The Benefit and the Burden explains me consequences of a corporate tax system that rewards debt while doubletaxing corporate profits:

Interest payments are a deductible business expense that reduces taxes; dividend payments are not. Many economists believe that the favored treatment of debt has led corporations to become overleveraged, contributing to bankruptcies during economic slowdowns. While dividend payments can be suspended when corporate income fails, interest payments must be made on schedule regardless of circumstances.

There's an irony here, as Bartlett notes. Despite its very high rate, our system of corporate taxes "has been a declining source [of revenue] for many years."

In the early 1950s taxes on corporations constituted 33 percent of federal revenue. In 2010 it was less than 10 percent. The main reason, historicaUy, for the decline in corporate tax revenue is mat debt, with its tax-deductible interest payments, has replaced equity as die major source of corporate finance."

Our business-tax structure has been great for private-equity moguls and leveraged buy-out operators like Mitt Romney and Stephen Schwarzman, who have made fortunes gaming the system. But it has been destructive to die long-term health of many U.S. companies and to American workers who have lost thefr jobs as a consequence of tax incentives that encourage companies to pile up debt.

Bartlett reviews the pros and cons of popular tax-reform proposals such as the flat tax and FairTax, and he finds them wanting. He beUeves that the FairTax - a national sales tax in the range of 23 percent - is unworkable, citing experts who have "concluded that a rate significantly higher than 23 percent would be necessary for it to be revenue-neutral."

From here, Bartlett builds the case for his own favored reform, a valueadded tax. The VAT is similar to the FairTax in that it taxes from consumption rather than income. But because the VAT is collected at each stage of production - with credits provided against previously paid taxes - it bypasses many of the weaknesses inherent in a traditional retail sales tax, such as double taxation on certain capital purchases. This credit feature of the VAT makes revenue collection largely self-enforcing, as businesses are encouraged to report taxes paid on capital purchases so they can be properly reimbursed. Bartlett correctly heralds the VAT as "designed to overcome the administrative problems" of the FairTax while raising "more revenue at less economic cost than any other tax. …