Gross: Corporate Taxes and a Case of Euro Envy

Today's politico-financial elite seem genuinely confused about the imminent threat posed by Europe. Either Europe is a Socialist redoubt where invasive government, high taxes and the quaint insistence on maintaining a social welfare safety net deter innovation, entrepreneurship and growth—a state of affairs Americans must avoid like the plague. Or perhaps it's a capitalist haven that is kicking the tar out of the United States with its low corporate tax rates and gentle securities regulation—policies the United States should emulate.

Last week, Glenn Hubbard, dean of Columbia Business School (and quite possibly the only Republican on the Upper West Side), penned a brief for lower corporate tax rates in the Wall Street Journal (purchase required). Hubbard, a former Bush economic adviser, noted that nations around the world are competing for capital in part by reducing tax rates, singling out Germany and Great Britain. The article concluded with a (surprise!) plea to reduce American corporate taxes. Hubbard's essay was a curtain-raiser for a meeting convened by Treasury Secretary Henry Paulson on corporate taxation. A background paper lamented that the United States' combined statutory federal and state corporate income tax rate is the second highest in the Organization for Economic Cooperation and Development. The paper warned darkly that Germany "is expected to reduce its total tax rate from 38 percent to 30 percent in 2008," and that lefty havens such as France, Italy, Spain and Sweden all have lower statutory corporate tax rates than the United States. Set aside for the moment the fact that, thanks to endless clever tax shelters, virtually no corporation pays the statutory rate. The obvious solution? Cut corporate tax rates in the United States.

The Euro-envy meme continued in today's Wall Street Journal, with an op-ed (purchase required) by Phil Kerpen of the American Enterprise Institute, arguing for a reduction in the corporate capital gains tax. "France and Germany, traditional bastions of big government, exclude 95 percent of corporate capital gains from taxation," Kerpen noted with approval.

Meanwhile, investment bankers, accountants and executives of American stock exchanges complain that the rules-based regulatory and accounting regime enforced by the Securities and Exchange Commission is causing the United States to lose ground to London, the re-emerging financial center whose regulatory authority, the Financial Services Authority, favors a more lenient, principles-based approach.

And yet many of these same capitalists who tout the glories of low European corporate taxes regard Europe as a bugbear, on a par with labor unions, journalists and Michael Moore. Mitt Romney, the presidential candidate with the most financial experience and an advocate of lower corporate taxes, routinely uses Europe as an epithet. At a luncheon last week, the CEO of one of New York's top financial firms, which recently made a major acquisition in Europe, nearly spit out his endive salad when a colleague, long resident in London, revealed that she had given birth to two healthy children at National Health Service hospitals. After all, it's an article of faith among the American executive-ariat that the British national health system—and, by implication, any national health system—is a disaster not fit for yuppies.

As much as they envy the corporate tax regime, the op-ed-ists who lust after Europe's corporate tax regime loathe the continent's personal tax regime, which relies on income taxes and hefty consumption taxes to fund universal retirement, health care and social welfare benefits. And that's what makes this selective European benchmarking so hypocritical. Europe is able to maintain lower corporate tax rates in part because it levies high taxes on the wages and consumption of all its citizens. (OECD data show that in 2006, the average "tax wedge"—including employer contributions for entitlements like Social Security and Medicare—was 28.9 percent for the United States, compared with 52.5 percent for Germany and 50.2 percent for France.) Germany may be poised to slash its corporate income tax, but it just raised its value added tax, from a high 16 percent to a stratospheric 19 percent.

As they look to Europe, the selective benchmarkers are, in effect, assembling a meal a la carte, cherrypicking the items that are cheaper in Europe than in the United States, and concluding that continental cuisine is therefore much cheaper.

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