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Governor Christie: 'A Wretched Tax System'

Jul 16, 2014

New Jersey Gov. Chris Christie sat down with CNBC's John Harwood today at the Delivering Alpha conference, and after the predictable political questions, the conversation turned to the economy. Christie was characteristically direct:

What we've had is the most stagnant, limp, absolutely unimpressive recovery post-recession than we've seen in this country in decades. The fact is America has one of the largest if not the largest and best economy in the world. But talk to people on the streets every day in New Jersey and ask them if they feel like we've recovered, and I can tell you that most of our citizens don't.

How do we fix the problem and raise living standards in this country? Christie ticked off three areas of needed reform: taxation, regulation and education. (Video) For this post, we'll highlight his tax comments:

There are certain principles that help to create a vibrant economy ... things that we're not doing at the moment. First off, we have a wretched tax system in this country both federally, on the individual and corporate levels, and at the state-based level in lots of places, including my own state, which disincentivize economic growth, which disincentivize entrpreneurial job creation and which make us less competitive with the rest of the world.

The fact is we need to get around the table and redo this tax system, which I think is one of the real wet blankets on our economy. 

More from the Christie interview here

Meanwhile, a well-known economics writer, Veronique de Rugy, points out the corporate tax system has been wretched for quite some time. In a The Corner blog post on corporate inversions, the Mercatus Center senior research fellow reports that Congress went through a similar exercise in 2002. That year she wrote a column for The Cato Institute offering a two-step solution to the perceived problem. The first one:

Cut the corporate tax rate. The recent rash of corporate inversions is the warning that the U.S. corporate tax has become dangerously uncompetitive. While the United States led the world in 1986 by cutting the corporate rate from 46 to 34 percent, most major countries followed suit and some surpassed us by cutting even further. Meanwhile, the United States raised its rate to 35 percent and piled ever more complex tax rules on international businesses. At 40 percent (federal plus state), the U.S. corporate income tax rate is the fourth highest in the 30-country OECD.

A substantial cut in the corporate tax rate would greatly reduce the inversion problem and other corporate tax avoidance problems that have concerned policymakers recently.

She adds: "[The] U.S.’s corporate tax rate is even worse relative to its competitors now than it had been in 2002, meaning that the appeal of inversion has increased."

And the second step identified by de Rugy:

Adopt a territorial tax system. Along with a lower rate, the U.S. should adopt a territorial tax system. That would eliminate the need for corporate inversions and allow U.S. firms to compete on a level playing field in foreign markets. A territorial system would be much simpler than the complex worldwide system that has been built piecemeal over decades without a consistent foundation. As the Treasury study notes, “The U.S. rules for the taxation of foreign-source income are unique in their breadth of reach and degree of complexity.”

Many of those rules would be done away with under a territorial system. The ultimate solution is to replace our income-based tax system with a low-rate territorial system that has a consumption base. That way, global corporations will be encouraged to move their operations and profits into the United States rather than fleeing for lower-tax climates. 

Those two steps would definitely go a long way in reducing the wretchedness that Gov. Christie so correctly highlights as an obstacle to economic growth, one that's been around for too, too long.

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