US tax code as Gordian knot: Why Paul Ryan needs two whacks at tax reform

Top priority is to lower the corporate tax rate to help US firms compete with trading partners lowering their own rates. With a new president, Congress can take a second whack at reducing the individual rate. 

Our federal tax code is one big Gordian knot. It has so many rules and loopholes and deductions that its complexity strangles the growth of the American economy and causes American companies to locate overseas.

When Alexander the Great confronted the original Gordian knot, it took him one mighty blow of his sword to cut through it.

For Paul Ryan, who chairs the House Ways and Means Committee, it will mostly likely take two.

First he has to take a whack at the corporate rate, an urgent priority given the intense international competition to lower the rates among our trading partners.

Then, when we have a new president, he can take a second whack at the individual rate, which includes pass-throughs for small businesses.

Some in the business community want Ryan to tinker around the edges and not strike hard and swiftly for reform.

One proposal, put forward by Sens. Rand Paul (R) of Kentucky and Barbara Boxer (D) of California, would pay for an increase in spending on the highway bill by lowering the tax rate for money locked-up overseas. The idea is to encourage the “repatriation” of those dollars with a tax holiday. Unfortunately, such repatriation schemes have been tried in the past and haven’t proved to be successful. Indeed, the Joint Committee on Taxation concluded that such a maneuver would cost the Treasury $110 billion dollars, far more than just a simple extension of the road building program.

If the idea is to do something that is fiscally responsible, this is clearly not the way to go.

To Ryan’s credit, he has rejected this approach as unworkable, as has his counterpart in the Senate, Finance Chairman Orrin Hatch (R) of Utah.

Other folks have offered a half-way point to reform.

Some are talking about the creation of an “innovation” box or some other tax credit strategy that might lower the effective rate of the corporate tax code and might help ease a political problem with the small business community.

But in my estimation, further complicating the tax code with new schemes is adding more layers to the Gordian knot.

The American economy slowed to a crawl in the first quarter of this year.

Part of the reason was the lousy weather, part of the reason was a decline in exports, and part of the reason was the slowdown in the international economy (especially China).

Policy makers have decided to focus first on passing trade agreements, especially with Asian trading partners.

That is all well and good, but nothing will spur the American economy better and faster than dramatic reform of the tax code, especially on the corporate side.

We are falling behind the rest of the world when it comes to tax reform. The Japanese just announced that they were once again cutting corporate taxes to give their companies a competitive edge.

And they already have a more favorable corporate tax rate than we have.

The business community needs to speak with one voice and support Paul Ryan as attempts to untangle the Gordian knot of tax reform.

He needs to strike hard and fast and not tinker around the edges.

John Feehery publishes his Feehery Theory blog at http://www.thefeeherytheory.com/.