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Why Changing Business Taxes Is So Difficult


Well, let's talk now about the tax code since, this week, the president and Republican leaders unveiled their framework for a major overhaul. Front and center is a big cut in taxes on business with the goal of spurring economic growth. David Wessel is a director of the Hutchins Center at the Brookings Institution and a contributing correspondent for The Wall Street Journal. Yesterday, you may recall, he talked to us through the question of who would benefit from the GOP tax plan. Today he's back to talk to us about what it might mean for business.

Good morning, David.

DAVID WESSEL: Good morning.

KELLY: So it seems like one of the things you always hear when people talk about the business tax code is that it is broken. So let me start there - is it broken?

WESSEL: Yes. Look, the tax rate on corporate profits in the United States is 35 percent. That's higher than in other major countries. And that's encouraging companies who can locate elsewhere to do so. The tax code encourages companies to rely more on debt to finance themselves than on selling shares of stock. And it doesn't reflect the realities of globalization, a world in which capital can easily move across borders and companies can park their patents and tax havens and so forth. But the problem is we've got to figure out how to change the business tax code to encourage businesses to invest in the U.S. without losing a lot of revenue - the corporate tax brings in about $300 billion a year - and without giving a windfall to the best-off Americans, some of whom are entrepreneurs creating the future and some of whom are simply making or inheriting a lot of money.

KELLY: OK. So the goal is encouraging businesses to invest. Does this tax plan, as far as you've seen so far - does it - would it do that?

WESSEL: Yes. Essentially, by letting business keep more of the profits from their investments, we think they would invest more. It would lower the top corporate tax rate from 35 percent to 20 percent, cut the tax on many businesses that aren't legally organized as corporations. It will allow companies to deduct all their spending on computers and machines in the year in which they spend the money instead of spreading the deductions out over time. So direction - yes, up - it would encourage businesses to invest more than they do today.

KELLY: But the big-picture question then becomes - would this boost the overall economy? I mean, that's the big goal here. Right? Would this create jobs?

WESSEL: Exactly. So fans of the plan, like the president, say it would boost investment a tremendous amount, unleash a wave of faster productivity growth and eventually higher wages. Maybe...

KELLY: What do you say?

WESSEL: Well, it seems to take more than the promise of slightly higher profits to prompt businesses to invest. After all, business investment has been very disappointing lately, even though businesses can borrow very cheaply, the stock market's high. And then the other thing is if you're going to cut the business tax and run up the deficit, to think about the big picture, you have to think about - how are we going to close this deficit? What taxes will we raise? What spending will we cut? Will we get higher interest rates? And that could hurt the economy.

KELLY: Let me circle you back to where we started then. Would this tax plan and these cuts bring an end to the exodus of jobs and American corporate headquarters to overseas?

WESSEL: Would it end it? No. Look, American multinationals are going to continue to invest and employ overseas because they have so many customers there. And some companies are going to figure out ways to move their patents to tax havens to reduce their taxes. But the point of the exercise is this - companies say, we're going to Ireland because they're not going to tax us very much. And this plan responds by saying, OK, then the U.S. won't tax you very much either. It'll reduce, though it certainly won't eliminate, the incentive for companies to shift profits and production and jobs overseas.

KELLY: All right. Thank you, David.

WESSEL: You're welcome.

KELLY: That is David Wessel, director of the Hutchins Center at the Brookings Institution, also contributing correspondent for The Wall Street Journal.