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Only Modest Tax Reforms Are Needed to Get Domestic Industry Growing Again
Raymond Richman, 12/24/2015

John H. Cochrane, senior fellow of Stanford University’s Hoover Institution and formerly of the Booth School of Business at the University of Chicago, writing in and op-ed in the WSJ, 12-23-2015, entitled “Here’s What Genuine Tax Reform Looks Like” states that,  “The first goal of taxation is to raise needed government revenue with minimum economic damage.”  No, the first goal of taxation is to distribute the burden of taxation equitably, i.e., fairly. Minimizing economic damage is a very important goal.

Another important goal is adequacy to fund the functions of government without causing an undesirable level of inflation. Governments may impose fees and taxes based on the so-called benefit principle, such as court fees, charges to record transfers and ownership of property, and taxes on motor vehicles to finance the construction and maintenance of roads and bridges. Minimizing economic damage also includes avoiding excessive disincentives to work, invest, and save. There is nothing in Cochranes’ writing to indicate that he is an expert in the economics of public finance.

He prescribes a number of reforms, some of which I agree with. First and foremost is his proposal to abolish the corporate income tax. He is correct that “With no corporate tax, arguments disappear over investment expensing versus depreciation, repatriation of profits, too much tax deductible debt, R&D deductions, and the vast array of energy deductions and credits.” He does not conclude that corporate earnings should be taxed, instead, under the personal income tax, as I have proposed in recent publications.

Instead, he proposes that “government should tax consumption, not wages, income or wealth”, not inheritances, nor capital gains. Doing so, he argues, would eliminate the need for the “complex web of shelters”, including IRAs, health savings accounts, life insurance exemptions, and the “panoply of trusts that wealthy individuals use to shelter their wealth and escape the estate tax”. He would reduce the progressivity of the personal income tax, eliminate “All the various deductions, credits, and exclusions”.

He asks, “Why is tax reform paralyzed? Because political debate mixes the goal of efficiently with so many other objectives. Some want more progressivity or more revenue. Others defend subsidies and transfers…”, holding reform hostage. “We should be able to debate revenues and progressivity separately, separating the tax code from the subsidy code.

What the author is proposing is not tax reform but a complete change in the structure of taxes. Following are the tax reforms I would propose:

  1. Abolish the corporate income tax and tax the earnings of corporations as we now tax partnerships, which is what corporations really are, “limited liability partnerships”. The author’s condemnation of the corporate income tax is entirely valid.
  2. The personal income tax needs reform but it should be possible for a congressional majority and the President to agree on some reforms and simplification such as: limiting depreciation allowance on buildings and real estate to amounts actually invested, buyers taking as the basis for depreciation the amount shown on the books of sellers at the time of sale, imposing a limit on the deduction for interest on home mortgages, eliminate the alternative income tax, impose a limit on charitable deductions, taxing the value of fringe benefits provided by employers, eliminate exemption from income tax of foreigners and foreign governments and entities.

These are mild reforms compared with those Cochrane proposes but unlike the latter are politically possible. What Cochrane proposes is not only impossible politically but indefensible economically.

Why shouldn’t income from investments – capital gains and dividends be taxed as income? Both were taxed during the period after the income tax amendment passed in 1913, and America’s  economic supremacy was established during that period.  Americans are still saving, but unfortunately the savings are not invested in capital goods. America’s corporations are still investing all right but unfortunately abroad. Nike has not one plant producing gym shoes and sportswear in the U.S., Apple’s products are produced abroad, Hewlett-Packard’s computers and copiers are all produced outside the U.S.. Many American corporations earn profits abroad and refuse to repatriate their profits.

Abolishing the corporate income tax would help bring an end to some of these miserable practices which have nothing to do with the personal income tax. Mr. Cochrane wants to overhaul the tax system when all that is needed are very modest reforms, except for the abolition of the corporate income tax and taxing corporate earnings as the personal income of their shareholders, which is what is done with our taxation of partnership income.

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  • [An] extensive argument for balanced trade, and a program to achieve balanced trade is presented in Trading Away Our Future, by Raymond Richman, Howard Richman and Jesse Richman. “A minimum standard for ensuring that trade does benefit all is that trade should be relatively in balance.” [Balanced Trade entry]

    Journal of Economic Literature:

  • [Trading Away Our Future] Examines the costs and benefits of U.S. trade and tax policies. Discusses why trade deficits matter; root of the trade deficit; the “ostrich” and “eagles” attitudes; how to balance trade; taxation of capital gains; the real estate tax; the corporate income tax; solving the low savings problem; how to protect one’s assets; and a program for a strong America....

    Atlantic Economic Journal:

  • In Trading Away Our Future   Richman ... advocates the immediate adoption of a set of public policy proposal designed to reduce the trade deficit and increase domestic savings.... the set of public policy proposals is a wake-up call... [February 17, 2009 review by T.H. Cate]