AS CONGRESS struggles with the first Clinton budget, i should recall a lesson from 1986 when members last wrestled with major changes in the U.S. tax system. The Congress presumably did not want to tax the U.S. ocean-going fleet out of business. In 1986, it just wanted to raise a little extra money. Yet Congress forgot the laws of international competition. The result was to push the U.S.-controlled shipping fleet rapidly toward extinction.
Arthur Laffer may have claimed too much for his famous curve when he argued that lower tax rates would raise U.S. tax revenues across the board. Yet Mr. Laffer was surely right: In important instances, higher tax rates actually curtail the amount of tax collected. This happens because the tax base shrinks as employees and owners play avoidance games, reduce their work effort or simply go out of business.
In the Tax Reform Act of 1986, the U.S. Congress managed to enact a tax that vindicates Mr. Laffer's basic proposition. In its last-minute rush to balance the revenue figures (if only on paper), Congress enacted a gaggle of complex foreign tax provisions, all designed to squeeze revenue out of offshore activities, most of them misguided.
Among these measures, the most conspicuous failure was the tax on foreign earnings of the U.S.-controlled shipping fleet. According to a GAO study, the new shipping tax miserably failed to raise the revenue promised -- an additional $160 to $240 million over five years, or about $40 million a year. Instead it nearly sank the last vestiges of the U.S.-controlled merchant fleet.
While the tax details are mind-numbing, and mainly of interest to chronic insomniacs, these are the facts in summary:
Before 1986, U.S.-controlled ships paid U.S. tax on their foreign earnings at the normal corporate rate if the earnings were not reinvested. In 1986, however, the U.S. disallowed deferral (i.e., postponement but not forgiveness) of U.S. taxes for earnings reinvested in the shipping industry. The change was rushed through Congress on the superficial argument that shipping should be taxed like any other industry.
The problem is that shipping is not any other industry. U.S.-controlled ships compete for cargo with ships controlled by Taiwanese, Danish, British, German, Norwegian, Japanese, Greek and other owners. The shipping industry is highly capital-intensive, so collection of the U.S. tax whether or not earnings are reinvested significantly adds to the cost of doing business.
