An Odd Hurdle for Tax Reform

Steve Lohr writes,

Mr. Auerbach’s approach, embraced by the Brady proposal, will also face a hurdle at the World Trade Organization. Among its provisions is to allow American companies to deduct domestic wages from taxation, which makes it less costly to employ workers and helps them offset the higher price of imported goods. A wage deduction is not currently permitted under W.T.O. rules, and is likely to be seen as an unfair subsidy to American companies and a trade barrier.

Pointer from Greg Mankiw. As if domestic special interests were not enough of a hurdle.

7 thoughts on “An Odd Hurdle for Tax Reform

  1. This general kind of issue is a major motivation for Brexit but has not been acknowledged by the Remainers.

  2. What will remain, they predict, will be the House proposal to sharply reduce the corporate tax rate. “The result will be a giant corporate tax cut that benefits the rich because most of the owners are rich,” said Robert McIntyre, the director of Citizens for Tax Justice. “Everyone loses except those at the top.”

    That statement is a joke.
    A quick Google search cannot find aggregated stock ownership data, but I will dare to say that a huge percentage of [public] corporate stock ownership is through institutions: mutual funds (with many held in retirement accounts), pension funds, insurance companies, university and other “charitable” endowments, private investment accounts, and the like, which ultimately benefit mostly-ordinary individuals, either through their investment and retirement programs, or by reducing their insurance premiums, tuition obligations, etc.
    Private corporations, a/k/a small business, may or may not be owned by the “rich” (however that may be defined; Mr. McIntyre follows form of most financial writers who never define their terms.) I’ve included a link to AAPL’s stock ownership info, as of October 2015, at the bottom. As of that date, 60% of AAPL’s public stock is held by institutions.
    It seems to be a tenet of “tax justice” people that anything that benefits the “rich,” EVEN IF it also benefits everyone else, must per se be a bad thing. Because heaven forfend that we should seek any tax change that may benefit the “rich,” without ever considering who else may also benefit.
    Mr. McIntyre needs to read, or re-read, Henry Hazlitt’s “Economics in One Lesson.”

  3. Can someone explain more precisely what “allow American companies to deduct domestic wages from taxation” means? Obviously, American companies have always deducted wages as expenses, so what are they talking about?

    • It must mean (what else could it mean) an additional subsidy.

      But this brings to mind an interesting thought. The WTO wants to prevent protectionism. However, it is really none of their business the ratio of automation to human labor a firm employ as long as it is not a competitive support.

      What can be done with the tax code to untax labor that is Revenue neutral?

    • Companies will be able to deduct domestic wages but not non-domestic wages, thus the subsidy to employ U.S. workers.

      The key here is that this is not an income tax, rather a consumption tax, but structured to look like an income tax to the uninitiated. The idea is to have a uniform total U.S. tax burden on all consumption in the U.S. A deduction is given for domestic wages and not foreign because domestic workers pay U.S. income taxes (and thus it functions similar to a VAT credit on inputs) whereas foreign workers do not pay U.S. income taxes and so no credit offset is needed.

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