Tax reform can be good for US plastics industry

For my money, the biggest economics story recently is also one of fundamental importance to the plastics industry: the Trump administration's outline for tax reform.

In my opinion, tax reform is far more important to the country and to our industry than either health care or immigration. Those issues need to be addressed, but in the long run they are not as important as tax reform.

This is because a substantial improvement to the tax code is essential if we are to sustain a long-term trend of rising prosperity. And since trends in the demand for plastics products closely follow trends in overall economic activity, it is not a stretch to say that rising prosperity is good for the plastics industry.

It should not have taken 100 days to get this tax plan announced, especially when you consider that what was revealed is really just an outline. But I like almost everything I have heard so far. In fact, I really like it.

It is not perfect, there are some significant issues yet to be worked out, and Congress can still mess it up. But if we can get to the finish line with most of this intact, it will be an enormous improvement over what we have now. And it will result in a sustained increase in economic activity.

There are two main parts of the U.S. tax code and both are in dire need of reform: personal taxes and corporate taxes. For personal taxes, the Trump plan lowers the tax rates, decreases the number of tax brackets from seven to three, and eliminates most deductions and loopholes. Yes, yes and yes. For the majority of U.S. households, the long-term results of complicated tax laws have been uncertainty, inefficiency and even perverse incentives to make the kind of suboptimal choices that ultimately produce things like bubbles in the housing market.

We should engage in a rigorous debate about whether the proposed tax rates are too high or too low, and we can include the optimal number of tax brackets as part of that debate. But the real prize here is the elimination of deductions and loopholes. When it comes to paying personal income taxes, I can think of very few areas in our market-based economy that should be "tax-advantaged."

For American households, income should just be income and spending should just be spending (unless they are unlawful). That includes interest paid on mortgages, so I think that deduction, in particular, should be removed, but the Trump plan retains it. Charitable contributions are one of the rare areas where market-based solutions are not appropriate, so I am comfortable that the proposed plan leaves that deduction in place.

The overall goal should be that, with few exceptions, the federal government should not be picking winners and losers in the marketplace. Deductions and loopholes actually create market distortions that are ultimately more costly than the problems they are attempting to remedy.

In the long run (and I believe that most of us are in this country for the long run), the market is a far better judge of winners and losers than are elected or appointed officials. If you don't believe me, then ask the CEO of United Airlines: Congress and the Department of Transportation will have no part whatsoever in the dramatic improvements we will immediately see in the market for air travel.

On the corporate side, owners and managers in the plastics industry do not need me to alert them to the problems in complying with the U.S. corporate tax code. The excessively high corporate tax rate combined with a vast array of deductions and loopholes has created a system in which a tremendous amount of energy is spent trying to beat the system. A huge amount of this energy is channeled into lobbyists that do not produce anything — they just do the bidding of special interests all trying to maintain their tax-advantaged status. And those companies that cannot beat the system by staying here have a strong incentive to move to other countries.

All of this is a huge waste of precious time and money and talent. As the chart above illustrates, tax receipts as a percentage of GDP never get above 20 percent. The corporate tax rate is nominally much higher than this, as is the rate on the top income earners on the personal side. But no matter what nominal rate has prevailed over the past 60 years, the overall effective rate that the federal government receives is always less than 20 percent.

The takeaway from this is that there is an upper boundary to what we are willing to pay. When the nominal rates rise above this level (which is where they are at the present time), people will allocate their resources toward avoiding taxes. After a certain point, taxes become a political numbers game, not an economic reality. But it is a game that costs too much to play.

The loss of productivity due to gaming this system, combined with the trillions of dollars that are parked in offshore accounts because it costs too much to repatriate them, are a large and unnecessary burden on the overall economy. And I have not even mentioned the fact that many international companies choose not to invest in the United States, or even choose to leave the United States, because of the huge tax advantages in other countries.

Therefore, it is entirely plausible to predict that tax receipts to the federal government would actually increase if the tax rates were reduced. The opening bid in the Trump plan calls for a corporate rate of 15 percent. I personally think this is a good rate because profits earned by most corporations are taxed twice — once at the corporate level and then again at the personal level when it is paid out in dividends. The rate will most likely be negotiated upwards, but as history shows, any rate over 20 percent is just wishful thinking.

A reform to the tax code that results in as simpler system with realistic rates at competitive levels would release a surge in economic activity, and it would generate a substantial boost to productivity. Tax receipts would actually rise due to growth in the economy. Wages and corporate profits would also rise. So would demand for plastics products.