US Domestic Tax Policy:

1. US Domestic Tax Policy: Impact On The Balance of Trade James Kaplan US & Global Trade Politics - Prof. Malawer Spring 2012

2. Promoting U.S. Competitiveness • Political and Private Sector leaders seek to make the U.S. more competitive and promote exports. “We need to make America the best place on Earth to do business.” - President Barack Obama (2011) “The U.S. economy’s 35 percent corporate tax rate is among the highest in the industrial world, reducing the ability of our nation’s businesses to compete in the global economy and to invest and create jobs at home.” - Former Governor Mitt Romney (2012)

3. Policy Question: Effectiveness • Would lower taxes lower costs and, therefore, promote sales overseas? “Does the concept of competiveness have meaning in formulating corporate tax policy?” - Jane Gravelle, CRS (2011)

4. Pro: Lower Taxes Promote Exports • “Higher tax rates raise a country’s production costs, leading to a decrease in exports in the long run.” - Academic Study: The Impact of Taxes on Trade Competitiveness • “Reform of the U.S. corporate tax code is essential to meeting the challenges of a global economy.” -Think Tank Paper: Global Competiveness and the Corporation Income Tax • “If you tax me at a higher rate than other companies are taxed at, then I can’t compete with them anymore.” - Remarks: Caterpillar CEO Jim Owens

5. Con: Taxes Do Not Impact Trade • “The resulting growth in exports relative to imports might lead to an appreciation of the dollar, which in turn, by making exports more expensive to foreigners, might undo any export advantage.” - Think Tank Paper: International Taxation • “Taxes on export income…have no direct bearing on the balance of trade. The reason is exchange-rate adjustments, which act to neutralize the impact of tax policies targeted at trade.” • CRS: Taxes and International Competitiveness

6. Alternative Argument: Are We Asking The Wrong Question? • “While firms may compete, countries trade… “better off” seems a more appropriate objective than “competitive” ...It is important that public discourse move away from meaningless concepts such as international competitiveness and instead focus on what tax policies might be optimal, in they fulfill the more appropriate objective of “better off.”” - CRS: Does The Concept of Competitiveness Have Meaning in Formulating Corporate Tax Policy?

7. Proposals To Use Domestic Tax Policy To Promote Trade • Lower Overall Corporate Tax Rates • “Countries with low taxes will tend to export more.” (Beck & Chaves) • Reform The Tax Code • “End the hodgepodge of distortionary, narrow breaks.” (Holtz-Eakin &Gray) • “Broad and significant corporate tax reforms” necessary. (JEC)

8. Policy Recomendation • Use targeted tax relief to support certain niche industries and small business in their efforts to expand into international markets. • Currency adjustments are not immediate, so can have short-term benefit. • Small markets and/or small companies don’t impact currency rates • Manufacturing sector benefits, in particular.

9. Conclusion: An American Goal • "America needs to get back to doing what it's always done best -- a country that builds and sells products all over the world that are stamped with the proud words: 'Made in America.' " • President Barack Obama. March 13, 2012. • “American workers and businesses have unparalleled strengths. If we open new markets to what they produce and ensure that they are treated fairly, we can foster an environment for rapid economic growth and job creation.” • Former Governor Mitt Romney. 2012.