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Federal budget reform requires fixes to corporate taxes

Recently both President Obama and former Gov. Romney advocated cutting the rate of corporate income tax to less than its current 35 percent. Reducing that tax rate would make investments in the United States more competitive with those abroad. But ultimately U.S. businesses could suffer from election-year tax and spending commitments outside of a realistic plan to balance the budget.

For almost a century the U.S. has relied on corporate and personal income taxes to pay for the “federal funds budget,” representing all federal spending not supported by dedicated taxes and fees. In the last 60 years, corporate income taxes fell steadily as a share of national income, from six percent to little over one percent last year. In contrast, for 60 years, Americans have paid personal income taxes in a fairly stable range of seven to nine percent of national income. In the Eisenhower Administration, staffed with corporate executives, taxes on corporate profits paid for 30 cents out of every dollar in the federal funds budget. In recent years, corporate taxes paid for only five cents of each dollar spent, their lowest share since before World War I.

The share of corporate taxes fell as the federal government tried to encourage greater investment. Tax incentives allowed companies with heavy capital spending to deduct more of their cash outlays, bringing taxable income more in line with actual cash flow. Higher corporate deductions for investment also helped compensate for the failure of tax accounting to reflect the real cost of equity financing, such as dividends.

Lowering U.S. corporate tax rates to international standards, at 25 to 28 percent, makes sense. The devastation of World War II, foreign socialism and the American educational system once gave a substantial competitive advantage to U.S. operations. In recent decades, however, other nations closed these gaps, while using lower corporate tax rates to attract new investment. The U.S. corporate tax system has also pushed investment abroad by imposing a tax penalty when American firms bring foreign earnings back home. As a result after years of growth, domestic employment by U.S.-based multinational firms has remained stagnant for the last 20 years, at about 20 million, while those firms added five million jobs abroad.

However, no change in taxes or spending should be considered in isolation. After all, every tax discourages something; every dollar spent benefits someone. Until federal leaders link decisions on taxes and spending, our nation will continue to borrow too much.

A Republican House and Democratic Senate approved a federal funds budget this year with projected receipts of $1.57 trillion and outlays of $2.99 trillion. Congress fills that hole with debt, a mortgage on future taxes. New borrowing this year will add about $10,000 to the existing federal debt of more than $100,000 per U.S. employee. And this rate of borrowing is nothing new. In 2002-2004, for example, the federal government borrowed most of its federal funds budget.

For the first time since the end of World War II, federal debt now exceeds total annual taxable income. After that war, bipartisan federal leadership limited the growth of debt for a quarter of a century. Fiscal conservatives fought tax cuts when the government borrowed money, because they understood that federal spending grew faster when sold on an installment plan.

Obviously our nation must encourage investment. An economy standing still cannot create more jobs and win the race against rising interest on federal debt. However, economic growth will never accelerate faster and longer than compound interest, especially when interest rates rise. Ultimately someone must pay for borrowed spending and tax relief. Last year the federal government paid twice as much in interest as the $181 billion received in corporate income tax. Should U.S. corporations celebrate if they reduce taxes by $50 billion each year, while remaining on the hook for a portion of more than $50 billion a week in new debt?

Executives have long explained that corporate taxes are ultimately paid by those with stakes in their businesses – American consumers, investors and employees. Rising interest on federal debt will also be paid by some combination of those very people. That is why corporate executives have responsibilities beyond those of any special interest group.

Corporate lobbyists counsel against tying corporate tax rates to a broader agenda of greater federal discipline. Before taking that advice, corporate leaders should consider the fate of businesses today in Spain, Greece, Portugal and Italy.

White is the former mayor of Houston.

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