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A JOB FOR A CONSERVATIVE



Published: Fri, September 27, 2002 @ 12:00 a.m.



A JOB FOR A CONSERVATIVE

Washington Post: More than many of his colleagues, Rep. Bill Thomas, R-Calif., is a true economic conservative. He is energetically pro-trade, and he deserves much of the credit for pushing trade promotion authority through Congress. He is an enthusiastic simplifier of the tax code, rightly arguing that the mess of strange loopholes distorts economic activity. On an issue that has come before the Ways and Means Committee, which he chairs, Mr. Thomas should follow these principles more aggressively.

The issue is an export tax break that violates the rules of the World Trade Organization. WTO panels have repeatedly ruled that the break distorts trade, and a recent judgment gave the European Union the right to hit the United States with retaliatory sanctions if it isn't buried. The permitted sanctions are enormous: The EU may target up to $4 billion worth of U.S. goods, far more than has been allowed in any other WTO ruling. Even if the EU is wise enough not to exercise this right -- blocking U.S. goods would only hurt European consumers -- the ruling is damaging. It gives the European Union a club with which to fight off American efforts to fix Europe's protectionism on genetically modified food and other issues.

Export-tax problem

It falls to Mr. Thomas' House committee to fix the export-tax problem. As a believer in trade, Mr. Thomas wants to bring the United States into compliance with the WTO ruling. As a believer in tax simplicity, he wants to abolish the export-tax break, which complicates the tax code and has no strong economic rationale behind it. To the extent that American exporters use the break to cut their prices and boost exports, the scheme is a subsidy to foreign consumers. To the extent that American exporters simply pocket the tax break, it is pure corporate welfare. Because of the laws of economics, the tax break may boost exports, but it cannot reduce America's big current-account deficit, as that is determined by the gap between national savings and investment levels.

Mr. Thomas should therefore kill the export-tax loophole and use the extra revenue to shore up the government's rickety budget or (given that his party hates to raise taxes) to finance an across-the-board reduction in the corporate tax rate. But Mr. Thomas has stopped short of that. He is instead wrestling with alternative tax schemes that would placate the WTO while compensating most of the firms that lose from the closing of the loophole.

Mishmash of rules

Mr. Thomas' staff members make two arguments in his defense. First, their boss' proposals are at least simpler than the existing mishmash of rules on U.S. businesses that operate abroad. This is true, but an across-the-board cut would do a lot more for the cause of tax simplification. Second, the Thomas people say that an across-the-board cut would attract little support in Congress; members reserve their enthusiasm for targeted tax breaks that deliver big gains to vocal constituents. But the politics of taxes always push this way; that's why the tax code is riddled with loopholes. Mr. Thomas should not allow corporate lobbies to get in the way of his tax simplification principles.




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