Is the House blueprint for tax reform good for St. Louis?

St. Louis Post-Dispatch

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St. Louis Post-Dispatch Column

Is the House blueprint for tax reform good for St. Louis?

  • By Max Gillman and David C. Rose
  • Mar 8, 2017

President Donald Trump recently stated that he will release an outline for comprehensive tax reform in the coming weeks, and if his previous statements are accurate, his eventual plan will likely look substantially similar to the House Ways and Means Committee’s blueprint for tax reform. It is not too early to ask if the other parts of the plan are generally good for the country and St. Louis.

The blueprint plan reduces both personal income tax rates and the corporate profits tax rates. It also simplifies a number of elements of the tax code. Current rates are high enough to reward avoidance behavior for both individuals and firms. This reduces the effective base upon which the rate is applied and suggests that a reduction in rates might actually increase tax revenues.

Modern models of the economy show that the lower rates are on personal income and corporate profits, and the closer these rates are to being equal on average, the better for economic growth. These models also show that the flatter both rates are, the better. The House blueprint plan moves in the right direction on each of these fronts.

Through most of the 20th century, the U.S. was the manufacturing juggernaut of the world. As a competitor to U.S. firms and workers, China, which is today an industrial giant, was completely out of the picture. This was also true for many countries in Eastern Europe. But all of that has changed. Whereas the U.S. federal tax rate is 35 percent, the European Union and world averages are both about 22.5 percent, and Russia’s rate is 20 percent. Higher rates relative to the rest of the world drive firms out of the U.S. so they can enjoy lower tax bills.

Our firms and workers must now compete with firms and workers from not only China and Eastern Europe, but increasingly with South Korea and Southeast Asia. Even in Northern European countries like Ireland, with its 12.5 percent corporate tax rate, the competition is heating up.

The St. Louis region has been hit hard in recent years by this foreign competition, particularly in manufacturing. Unfortunately, the harm caused by this trend does not fall equally. Those hurt the most are honest, hardworking, unskilled workers who could have earned a good living in manufacturing employment.

These changes have hit St. Louis especially hard because manufacturing has historically been such an important foundation for our regional economy. It follows that increasing the net rate of return on capital investment as well as relaxing and streamlining capital deduction rules will help the St. Louis region more than many other regions since the St. Louis region has been faltering because of the lack of manufacturing jobs.

Still, St. Louis has many natural advantages. Being centrally located and serving as a rail and interstate hub, it is cheap to bring unrefined resources in and cheap to ship them out. Fresh water is a very important resource, and we have it in great abundance. Strong education produces a good workforce even among unskilled workers. Remove the corporate profit tax impediment and St. Louis’ natural advantages will likely reassert themselves.

Additionally, in the U.S., politicians have been using corporate tax policy as a political game. The higher the average effective rate, the more valuable are tax loopholes. This makes it easier for politicians to buy votes from corporations in return for loopholes. The result is a system with high rates and low yield in part because it is riddled with loopholes that reward the politically savvy at the expense of everyone else.

These loopholes are not just unfair to the rest of us. They also distort investment decisions. The richest firms are able to pay the most to get loopholes that are favorable to them, so high rates plus lots of complexity that hides loopholes is a good example of how the rich get richer at the expense of everyone else.

The House blueprint brings down the top and average effective rates significantly but, even more importantly, it closes many of these loopholes. This is fairer and better for general economic growth, and we think the St. Louis region stands to benefit.

Max Gillman is a professor of economic history and David C. Rose is a professor of economics, both at the University of Missouri-St. Louis.

 

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