Sen. Mike Lee, R-Utah, has rolled out a new tax plan in an oped today over at the Federalist. It looks like it could be a less radical and disruptive approach to corporate tax reform than the plan currently under discussion in the House, even though it would accomplish at least some of the same desired ends.
In the House, they’re talking about cutting the corporate tax rate from 35 to 20 percent, but then imposing the tax in a completely different way than today. Here’s a simple explanation (you can find a more detailed one here): Instead of taxing profits, they would tax all revenues generated within the United States, minus all expenses incurred within the United States. Expenses and revenues abroad would not show up on either side of the ledger. The effective result would be a system with radically different incentives than today, encouraging exports and potentially making many imports more expensive or even unfeasible.
For example, if Apple cannot write down the cost of making its iPads in China when it pays taxes on iPad sales within the United States, it changes the equation of how much they will cost here or whether it’s even worth importing them. Oil imports would be hit especially hard by this, forcing U.S. consumers to pay a substantial premium.
Lee’s idea would instead shift the corporate tax burden by falling back on an existing mechanism in the federal tax code: The individual rate. He would abolish the corporate income tax altogether and recoup “at least some” of the costs from the actual owners of corporations — the stockholders. He would do this by simplifying the tax code to treat dividends and capital gains exactly the same as all other income, taxed at the appropriate individual rate. This would put less of the corporate tax’s burden on workers and more of it on investors.
By Lee’s calculations, this still gives the investors a good deal, because at the moment, they’re already paying a large share of that corporate tax anyway. The tax, with its highest-in-the-world 35 percent rate, makes the companies they own less profitable and/or induces them to engage in irrational behavior that is aimed at tax avoidance rather than profitability.
Meanwhile, workers pay the corporate tax today in the form of lower wages. Lee’s plan aims to shift that burden away from them:
Economists differ on the precise ratio, but the consensus is that lost wages make up between one-quarter and one-half of corporate tax revenue. (According to one recent study, it may be even more.) But whatever the proportion, we know that eliminating the corporate tax would immediately liberate every penny of American workers’ share of it, and in short order boost take-home pay in every industry across the country….[W]ith workers’ share of the corporate tax liberated by the zero rate, a greater portion of all this new investment and growth would be channeled straight into workers’ paychecks.
If Lee can sell this idea as a pro-worker tax reform — a means of shifting the tax burden toward capital and away from labor — a you can imagine how someone like President Trump could get behind it. And that’s what would be required to move a plan like this one over the House plan, which has broad support from Speaker Paul Ryan and Ways and Means Chairman Kevin Brady.
An interesting fact about both Lee’s plan and the House plan is that their underlying concepts have some support on both the Right and the Left. Lee modeled his plan after one developed by two scholars, one from the Urban Institute and one from the American Enterprise Institute. The House plan was originally developed by liberal economists. This may put some conservatives off, but I think it’s actually an encouraging sign that conservative lawmakers are thinking outside their ideological boxes in an effort to implement a pro-growth reform of the tax system.
