Something for everyone
Oct 12th 2004
>From The Economist Global Agenda
http://www.economist.com/agenda/PrinterFriendly.cfm?Story_ID=3284455
What began as a commendable effort to resolve a festering trade
dispute with Europe has ended up as a feast for special-interest
groups. So much for making America.s tax code simpler, fairer and
less distorting
IN AMERICA, says Willem Buiter, an economist, .fiscal policy is not
made.it happens.. Countless lawmakers in Washington have a hand in it;
some of them even put their names to it; but none of them controls
it. Like a force of nature, tax bills gather momentum in outlying
committees, change shape as they approach the floor of the House or
Senate, then hit the statute books with unintended and often damaging
results.
Just such a bill is now about to become law. On Monday October 11th,
with its members itching to set off on their re-election campaigns, the
Senate passed a corporate-tax bill 650 pages long. Unless President
George Bush vetoes it, which is unlikely, the bill will distort
America.s tax code in favour of manufacturers, reward multinationals for
avoiding taxes and dispense fiscal goodies to any number of firms with
effective lobbyists. Needless to say, it was not originally intended to
do any of these things.
The bill began as a worthy effort to end a long-running trade dispute
with the European Union. The EU has long objected to the tax breaks
America offers to its exporters. In their current guise, these breaks
spare American companies from paying tax on some of their profits
from foreign sales and production. Without them, America argues, its
exporters would lose out to their European rivals, which do not pay
value-added taxes on their overseas sales. But the EU sees the tax
breaks as an illegal export subsidy. In January 2002, the Europeans won
the case at the World Trade Organisation. Since March of this year, they
have subjected a range of American goods to WTO-approved tariffs that
rise each month the Americans dally in fixing their tax code.
The bill passed on Monday may finally bring this case to an end. The
EU.s outgoing trade commissioner, Pascal Lamy, professed himself
pleased and vindicated. But the bill does not end the export subsidies
immediately; it will phase them out by the end of 2006. Mr Lamy will
study the bill.s 650 pages closely. In the meantime, the EU.s punitive
tariffs remain in force, at 12% and rising.
If the EU is pleased by this bill, America.s exporters need not be too
displeased. As one tax break closes, hundreds of others open. The bill
is crenellated with more loopholes than a medieval castle. Film studios,
cruise-ship operators and even accountants benefit. Tobacco farmers are
to be paid about $10 billion to give up quotas and price supports that
Congress bestowed on them decades ago. Multinational companies, many of
which keep profits overseas to avoid paying taxes on them at home, will
be rewarded with a one-year amnesty, during which time their foreign
profits can be brought home at a tax rate of just 5.25%, a fraction of
the normal rate.
The bill reserves its biggest tax break for manufacturing. The sector,
as defined by the Bureau of Labour Statistics, has shed 2.8m jobs over
the past four years. The lay-offs are often disastrous for the workers
involved, but they need not damage the economy as a whole, at least
over the medium term. Few economists still believe that manufacturing
is .special. or that .de-industrialisation. is quite as ghastly as
it sounds. Indeed, the decline of manufacturing employment is often
the result of welcome gains in productivity and inexorable shifts in
comparative advantage.
But the principle of comparative advantage counts for rather less in
Congress than the principle of electoral advantage. Eager to win votes
in hard-hit manufacturing states, lawmakers will cut the corporate-tax
rate for manufacturing from 35% to 32%, phased in over the rest of the
decade. Suddenly, everyone wants to be a manufacturer. Oil refiners,
software engineers and architects lobbied to be counted as such. Making
movies is manufacturing, the bill says, but making pornographic movies
is not (that, one can only presume, counts as a service). Even farmers
are now manufacturers. Cornbelt or rustbelt, smokestacks or haystacks,
it.s all the same to Congress when it.s in a giving mood.
How much will this all cost? The bill.s sponsors claim it will cost the
Treasury nothing. For every tax dollar given away.around 140 billion
of them, in all.another will be clawed back, they say. The bill does
close some loopholes and tear down some tax shelters. Many of the
giveaways are also supposed to be temporary. But tax cuts, even ones
with expiration dates, rarely die.some enterprising politician usually
finds a way to make them permanent. Assuming that happens this time, the
bill will only add to America.s fiscal difficulties.
Those fiscal problems are making many economists uneasy. But not all
are as fatalistic as Mr Buiter. Indeed, some still hope for fundamental
tax reform in the United States. For them, the true burden of taxation
is not the money it levies but the economic decisions it distorts:
decisions to work, save and invest. They hold up the tax reform Ronald
Reagan passed in 1986 as an example of how to broaden and streamline
the tax code, removing its distortions and freeing it from special
interests.
But within a few years of that landmark act, the pork barrels began to
roll again. Too many lawmakers want to see their pet projects enshrined
in the tax code. Too few keep sight of the interests of the economy as a
whole. From time to time, Mr Bush has hinted at his ambition to simplify
taxes as well as cut them. He has denounced the special interests served
by this bill. But he will probably sign it anyway. He is not a man with
much fiscal credibility. It will take a bolder president to tame the
forces of Congress.s nature.
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