The Right Way to Help Exporters: Kill Ex-Im, Reform the Corporate Income Tax

by Veronique de Rugy

As the Ex-Im Bank and its big-business beneficiaries continue their campaign to get its charter re-authorized, they persist in trying to argue that the bank is critical to allowing U.S. exporters to compete abroad. I have already explained why that is not the case, and explained why the U.S. needn’t subsidize its exporters just because other countries do. Subsidies are destructive in different ways for all parties – even the direct beneficiaries, who ultimately find themselves unable to compete in the long-run.

Besides, the Ex-Im Bank’s love for exporters only extend to a selected few of them. Not all exporters are equal before the Ex-Im Bank efforts: Only a special few 2 percent of U.S. exporters are privileged with Ex-Im assistance, while 98 percent of exports go without its support. And the ones who are special are really special: In terms of dollar amount of support, they’re mostly large corporations like Boeing, Caterpillar, General Electric, and Bechtel are some familiar names on Ex-Im balance sheets. Over at Mercatus, I made a few additional charts that highlight the top ten private Ex-Im beneficiaries by amount of support in FY 2013. ​As you can see, despite all of the rhetoric about being a champion of small businesses, when it comes to the money it commits to the cause, the Ex-Im Bank is very much in the “big business” business

But the Ex-Im Bank’s activities should also be judged against other policies pursue by the federal government. When we do, the tremendous inconsistencies in our policies become obvious. On one hand, you have agencies like the Ex-Im Bank that distribute goodies to exporters; on the other, the federal government punishes all exporters through an onerous corporate income-tax system.

As you know, for several years now, the U.S has had the highest corporate-income tax rate in the developed world. This chart shows the U.S. having the highest national statutory corporate-tax rates among the 34 members of the OECD, with its 35 percent rate. The U.S also has the highest combined rate (39.2 percent) when both the federal and average state rates are added. Japan used to hold the record for combined rates (39.8 percent), until it got its combined rate down to 36.8 percent in April 2012.

But the system is particularly punishing for companies competing abroad: The United States taxes corporations on a worldwide basis, meaning income from American companies are subject to American taxes whether they are earned in Everett, Wash., in Paris, or in Jakarta. By contrast, most wealthy countries don’t tax foreign business income — about half of OECD nations have “territorial” systems that tax firms only on their domestic income. For the most part, in other words, U.S. exporters will be facing a much less competitive tax system than most of their biggest competitors. French manufacturer Airbus, for instance, both faces lower rates than Boeing and is taxed on a territorial basis (meaning at the rate in place in the country where the income is earned). Good for Airbus if it earns income in a country that has a lower income tax rate than France — and its income faces a lower rate than the U.S no matter where it’s earned.

The bottom line is that the combination of high rates, worldwide taxation, and a competitive global marketplace makes our corporate-tax system quite harmful to U.S. competitiveness — and exports.

Now, things are better than it sounds for U.S. exporters because, as always, years of lobbying efforts on the issue have won them a tax credit for the share of the taxes paid to foreign governments or a tax break if they keep their foreign revenue abroad. Corporations can and do lower their effective tax burdens.

So what’s wrong? As I’ve said before, two wrongs don’t make a right. Corporations shouldn’t have to keep their money abroad to avoid a punishing tax regime. We ought to the corporate-tax system by lowering the corporate-income tax rate and moving to a territorial tax system

In fact, we’re actually looking at three wrongs trying to make a right, with Ex-Im’s targeted subsidy scheme trying to make up for our broken tax policy. Fixing tax policy would help all U.S. exporters alike rather than favoring a few select winners. It would would also help domestic companies that never have any intent of becoming an exporter. That’s what I call a level playing field.

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