Trade Dispute Gives US Excellent Opportunity To Reform Tax Law, Says Economist

by Mike Godfrey, Tax-News.com, Washington

03 March 2004

The pressing need to scrap subsidies given to US exporters under the Extra Territorial Income Exclusion Act has given the US Congress an ideal opportunity to improve the overall tax situation for the manufacturing and export sector.

“While lawmakers understandably are upset that the WTO is interfering with US tax law, this dark cloud does have a silver lining. The FSC/ETI provisions are not good tax policy and the revenue generated by repealing those provisions can be used to finance much-needed changes in tax law,” observed Heritage Foundation economist and tax policy expert Daniel Mitchell.

“But not all tax cuts are created equal,” he added. “To improve economic growth and competitiveness, policy makers should make changes that move the tax code closer to a simple, low-rate, consumption-base, territorial system.

Mr Mitchell argues that the FSC/ETI provisions should be repealed for a number of reasons. Not only for exposing the US to tariffs on its exports to the EU, but also because it will give lawmakers $50 billion over the next decade with which to make much-needed improvements to tax law.

This gives Congress two attractive options, Mitchell points out. By lowering the corporate income tax rate lawmakers would give a boost to economic growth and enhance US competitiveness. “Indeed, a 2-percentage point reduction should be viewed as just the beginning,” he said. The other option, in Mitchell’s eyes, is to shift toward a territorial tax system that also would improve the US economy and increase competitiveness.

Nevertheless, Mitchell thinks that the EU was ultimately wrong to attack America’s FSC/ETI law, and the WTO wrong to have ruled in their favor. “By imposing tariffs, the EU risks an escalating trade war that will hurt all nations,” he said.

“Fortunately, US policymakers can solve this predicament by doing something – corporate rate reduction or international tax reform – that would be worth doing even in the absence of the WTO’s misguided decision.”

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