You can tell that President Trump is getting serious about tax reform, because he has started lying about it.
Trump on the stump insists that the United States is the highest-taxed nation in the world. That is . . . not exactly true, or close to true, or within the realm of things that might be true if you squint a bit and turn your head sideways. It is, in fact, false.
We do have an extraordinarily high top corporate-tax rate — on paper, anyway. Our statutory top corporate rate is among the highest in the world, but the corporate tax code is a welfare program. You know how basically every president at every State of the Union address announces a special plan to encourage U.S. manufacturing or green energy or something like that? Those end up as exemptions and deductions in the corporate tax code, which, along with other tax-code favoritism, is why companies such as General Electric sometimes pay no taxes even in years in which they seem to be making a great deal of money. The effective corporate tax rate — what corporations actually pay — in the United States is not especially high, and it’s low if you have the right friends in Washington. The fact that corporate taxes vary so much from company to company and industry to industry is not an accident — the code is designed that way on purpose. It gives big powerful market incumbents a way to disadvantage potential competitors while giving power-brokers in Washington the power to make or break entire industries.
That’s a dumb way to run a tax code, but that’s how we do it.
The problem for the Left is that Democrats cannot, under most circumstances, tell the truth about U.S. taxes, either, because the American middle class does not want to hear that it isn’t paying enough in taxes to fund the benefits it wants. The Left insists that something, somewhere — somebody rich, preferably in a Republican-voting state — is getting over on us, that the rich are not paying “their fair share.” It is true that the highest-income Americans do make a great deal more money than do the poor and the middle class — that’s what it means to be high-income — but they already pay an even more disproportionate share of the taxes. The top 20 percent takes in about 55 percent of all income but pays about 70 percent of all federal taxes as Curtis Dubay, formerly of the Heritage Foundation, runs the numbers. Other analysts have come to similar conclusions. That’s what you’d expect: We have a progressive tax code, after all.
Our tax rates may be pretty low, but our tax code is still pretty lousy: It is complicated, it is politicized, and it imposes very high compliance costs on both individuals and firms.
Country-to-country comparisons tend to be exercises in cherry-picking. Switzerland is generally considered one of the best-administered countries in the world, and its taxes and public spending are a bit higher than in the United States, though lower than in much of Europe. The Swiss pay higher income taxes, but pay very low business and investment taxes, and essentially no capital-gains tax. (There are local taxes on profits from real-estate sales in some parts of the country.) It also has high wages but no national minimum wage, very free trade, and very light regulation in most respects. On the other hand, most workers are covered by some sort of collective-bargaining agreement. There’s a lot more to economic policy than tax rates as such. Northern European welfare states may have tax rates that look confiscatory from the American point of view, but some of them have much more free economies in other respects. On the Heritage “economic freedom” index, Switzerland, the Netherlands, Ireland, Canada, and the United Kingdom all rank higher than does the United States.
Our tax rates may be pretty low, but our tax code is still pretty lousy: It is complicated, it is politicized, and it imposes very high compliance costs on both individuals and firms. It creates perverse incentives for successful American companies that do business around the world, hence the massive cash hoards kept by U.S.-based multinationals such as Apple and the corporate inversions that see U.S.-based pharmaceutical companies and others relocating their headquarters to Ireland, the Netherlands, or Switzerland for tax purposes. Our tax rates and relatively low, and we should keep them relatively low — provided we can keep spending low enough that those relatively low tax rates do not ensure relatively high deficits for the foreseeable future. Spending, not taxing, is our big fiscal challenge.
That doesn’t mean there isn’t room for improvement — and lots of it — in the tax code. But don’t count on Donald Trump or his new best friends Chuck Schumer and Nancy Pelosi to tell the truth about what the problems are or how to fix them.
Fixing the ‘Rotting Carcass’ Tax Code
End the Corporate Tax
Tax Reform: Don’t Forget Personal Savings
— Kevin D. Williamson is National Review’s roving correspondent.