More Corporate Welfare

After months of bickering with European allies, U.S. unilateralism leads to war. Europe stews for a while, then figures out how to retaliate. This time, the fight is over free trade.

The story begins with a decades-old U.S. tax break that exempts a portion of U.S. exporters’ sales from the corporate income tax. The World Trade Organization ruled in January 2002 that this provision was, in fact, an illegal subsidy, which it certainly is.

So far, Congress has declined to cancel the subsidies, which go to powerhouses like Boeing and Caterpillar. The European Union struck back Monday, announcing retaliatory tariffs, starting at $17 million a month, on U.S. agricultural and manufactured goods.

The announcement should be seen as a blessing in disguise, giving Congress an incentive to lose some costly corporate welfare. But as lawmakers take up tax legislation this week, they’re doing the opposite. If they repeal the export credit, they want to create costly new tax breaks for industry that will further drive up a projected $5-trillion budget deficit.

Rep. Bill Thomas (R-Bakersfield), who heads the House Ways and Means Committee, is seeking legislation that would tie a repeal of the export subsidy, which is worth about $50 billion to American companies over 10 years, to $60 billion in compensatory tax cuts. Sen. Charles E. Grassley (R-Iowa) is on a productive track in endorsing a Treasury Department proposal to end a $25-billion tax loophole for cities that “lease” their sewage systems or subway cars, often to foreigners. But in the perverse logic of Thomas and some other lawmakers, the “saved” billions are supposed to be used to help “pay” for more tax cuts for industry.

The thinking is that with American manufacturers having shed more than 2 million jobs since the beginning of the Bush presidency, more tax breaks can help stimulate economic growth and competitiveness. But corporate taxes are already at their lowest levels since the 1930s, excepting one year during President Reagan’s first term. As a share of the economy, U.S. corporate taxes are almost the lowest in the industrialized world.

Further driving up the federal budget deficit with tax breaks will probably worsen U.S. sales abroad. The more money the Treasury has to borrow to cover the deficit, the more pressure there is on the Federal Reserve to raise interest rates to attract those funds, eventually driving inflation. Although Federal Reserve Chairman Alan Greenspan declared Tuesday that a weakened dollar would help tame the trade deficit, he also noted that interest rates would have to rise.

Tariffs imposed abroad are going to count California’s agricultural industry among their chief victims. Rather than tie itself in knots, Congress should just cancel the export credits and use the savings to reduce the deficit.