Politicians Who Support Ex-Im Should Embrace Corporate Tax Reform

On Tuesday, the House of Representatives voted—with the support of nearly all Democrats and a slim majority of Republicans—to reauthorize the Export-Import Bank, or “Ex-Im” for short. The credit-granting agency has been closed since June, when its charter expired. Bipartisanship is unusual these days, yet Washington can agree on supporting a program that leaves ordinary Americans as the losers. The Ex-Im Bank is corporate welfare at its finest.

The Ex-Im Bank provides subsidies to foreign customers of American companies such as Boeing and Caterpillar. Supporters of the Bank argue that it is beneficial to our trade balance, but over 98 percent of American exports do not depend on Ex-Im, and the 2 percent that do would likely be able to find financing elsewhere. As the research of the Mercatus Center’s Veronique de Rugy has shown, the Bank “fails to promote exports, create jobs, or support small businesses.”

Some proponents of Ex-Im acknowledge these drawbacks and limitations, but argue that the Bank needs to exist because other countries also have export-subsidy programs. In their minds, abolishing the bank would be the economic equivalent of unilateral disarmament. Indeed, the House reauthorization bill instructs the President to “propose a strategy to pursue with other major exporting countries…[the] elimination of all subsidized export-financing programs.”

While more sophisticated, this argument also falls flat. Export subsidy programs hurt America regardless of whether other countries have them. The Bank costs taxpayers $2 billion per decade and drives up prices for domestic consumers, destroying jobs. To paraphrase an old mantra, America should not jump off a bridge simply because all of our friends are doing it.

But the basic premise of their argument—that America should do more to increase its global competitiveness—holds true for another issue area: corporate tax reform. Politicians who support renewing Ex-Im to keep up with other countries should be enthusiastic about cutting our corporate income tax rate to levels on par with the rest of the developed world.

At 39 percent, America’s corporate income tax rate is the highest in the OECD. It was not always this way—three decades ago, America was somewhere in the middle of the pack. But other countries quickly realized that lower rates would attract more investment, boosting their economies.

Over the last 30 years, America cut its corporate income tax rate by 22 percent—respectable, but less than any other peer nation except Spain. Other countries, including social democracies such as Sweden and Finland, cut rates by 50 percent or more. The champion tax-cutter is Ireland, which cut its rate by 75 percent. No wonder Apple set up Irish subsidiaries to avoid punitive American taxes.

High tax rates, combined with a framework that taxes American corporations on their worldwide income (not just income earned domestically), have led American companies to conduct more business abroad, and American investors to buy more foreign assets. Corporations which stay in America nominally pay the tax, but research suggests that the burden really falls on workers in the form of lower wages and fewer jobs.

According to analysis by the Tax Foundation, cutting the corporate income tax rate to 25 percent would boost GDP by 2.3 percent and after-tax income by 2.1 percent, distributed evenly across income groups. Going further and cutting the rate to 15 percent would boost GDP by 4.3 percent and income by 4 percent. Along the way, such a policy would create nearly 800,000 jobs.

Slashing corporate tax rates would reduce federal revenues, but not by as much as might be expected due to the economic growth lower taxes would bring about. Besides, the corporate income tax accounts for just a tenth of federal revenues. OECD research finds that corporate taxes are more harmful for growth than other taxes, so revenue lost by a corporate tax cut could be made up in other areas with more limited negative consequences.

Preserving America’s international competitiveness is a worthy goal, but reauthorizing Ex-Im is not the way to do it. Rather, politicians who want to level the playing field with the rest of the world should put corporate tax reform at the top of their to-do lists.

Preston Cooper is a Policy Analyst at Economics21. You can follow him on Twitter here.

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