There are bigger problems with the American tax system than Donald Trump’s returns

Hamish McRae
The tax release shows that Trump’s tax payment that year was around 25 per cent of his income of $153m: AP

Presumably he leaked them himself. Donald Trump’s tax returns for 2005 landed in a journalist’s post-box in an unmarked envelope, and it does not take forensic scrutiny to see that it is marked “client copy”. Well, maybe it was some else who filched it from his files, but in the broader scheme of things it doesn’t matter. What matters is that there is serious discussion of the US tax system now that there is a once in a generation opportunity to knock it into better shape.

This is a political and media story, which for people who are interested in this sort of thing, is good fun. The tax release shows that Donald Trump’s tax payment that year was around 25 per cent of his income of $153m, much higher proportionately that that of Barack Obama (19 per cent) and Bernie Sanders (13 per cent) in their more recent filings. On the face of it, this shows him in a good light. But it is only one year, for the President has refused to reveal this tax affairs, and the payment would have been minimal were it not for the alternative minimum tax. This is a parallel tax that was brought in alongside the regular income tax code to prevent rich people using the complexities of the code to avoid paying much, or indeed any, income tax. The new President wants to abolish this.

That is the story running at the moment, and one that will run on awhile. But behind it is the story of the future of the US tax system, which is surely vastly more important. It is not very good. The point about a tax system is not how much a proportion of GDP is raised in tax, for that is a political decision to be made by the community. Rather it is whether the system is efficient, does not distort, does as little damage to the economy as possible, and is fair.

Each year, the Tax Foundation, an independent US organisation ranks the 44 countries in the OECD by their tax competitiveness. The US comes third from the bottom; only Italy and France are worse. At the top are Estonia, New Zealand, Switzerland and Sweden. (The UK is number 11: in the top quarter, but could do better.)

There are three reasons for the US’s low ranking. It has the highest corporate income tax rate in the OECD at 39 per cent, if you add state taxes and federal taxes together. It is one of the few countries that does not have a territorial tax system, to exempt foreign profits earned by domestic corporations from domestic taxation – encouraging them to leave foreign profits abroad. And it has a relatively high, progressive personal income tax rate (a combined top rate of 48.6 per cent), but one with many loopholes that enable people to pay little tax – and led to that alternative minimum tax noted above.

So what rationally ought the US to do? Well for a start, cut the headline corporation tax rate, sort out the taxation of foreign subsidiaries, and simplify personal by cutting the headline rate but also ending most of the exemptions.

The tantalising thing is that this is sort of the direction that the administration and the Republicans in Congress, led by Paul Ryan and Kevin Brady, are going, but only sort of. The corporation tax issue has been confused by the idea of “border tax adjustments”, in effect a tax on imports. The personal tax issue is confused by the removal of the alternative minimum tax, which would be fine if other tax changes made it unnecessary, but not fine if they didn’t. And as far as I can see no-one in the US has much enthusiasm for a federal VAT, the global standard consumption tax. This is going to rumble through the summer and it would be nice to think that a wiser tax system will emerge – nice but unrealistic, I fear.

Well, I hope I am wrong. But if you step back from all this, the curious thing is the way in which different countries around the world don’t benchmark themselves against those which have best practice, then try and apply their ideas. It is what happens in other walks of life, though maybe not swiftly enough. But the global benefit of all countries having significantly more effective tax systems would be massive.

And that is a bigger issue than one American’s tax returns.

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