Like everyone, I have been paying close attention to the campaign for the Republican nomination. I wanted to share some insights on the tax policy debate. I think everyone is missing the point of the debate over U.S. tax policy for a number of reasons. The candidate who actually understood U.S. policy and the good and bad of current and proposed U.S. policy would have a definite advantage in this campaign. So here goes my little tutorial on U.S. tax policy.
First let’s start with the misunderstanding of Mr. Romney’s tax rate. It is not 15%. It is at least 50%. Here’s why. When a corporation earns income, the corporation pays tax at 35% on all of the income. What’s left over after taxes can then be distributed to shareholders. This is in the form of dividends which are taxed at 15%. This doesn’t count state income tax. So while the shareholder may only be paying 15% directly, he is really paying 15% plus the 35% paid by the corporation.
Now let’s turn to what’s wrong with U.S. tax policy. It’s not the benefits to business owners and investors. That’s all good and works well. The tax law, as I have heard you say before, is a very efficient mechanism for promoting economic policy and even for stimulating the economy.
What’s wrong is the corporate income tax structure. Our corporate tax structure is one of the primary causes of our trade deficit. A U.S. business pays 35%+ tax on all of its income, regardless of where it is earned. So, if it earns the income by shipping products to France, it still pays corporate income tax on the money. In addition, France charges a 20% VAT on imports. In contrast, when a French company exports to the U.S., it is NOT required to pay U.S. income tax AND it receives an exemption from the VAT for the value of the exports. Effectively, the U.S. company is paying a 55% tax rate on its goods exported to France while the French company is only paying the smaller French income tax on its exports to the U.S.
There might be some reason why none of the candidates want to address this. I just think it’s a shame and the candidate that addressed it aggressively and in simple language could get some mileage from it.