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Busch: Tax Policy versus Currency Policy

Today, the House Ways and Means Committee (Chairman Levin, D-Mich.) will hold a hearing on China's exchange rate policy, focusing on its immediate and long-term impact on U.S. and global economic recoveries and job creation, and steps that could be taken to address the issue according to CQ. Here's a list witnesses scheduled:

  • C. Fred Bergsten, director, Peterson Institute for International Economics
  • Niall Ferguson, professor, Harvard University, Cambridge, Mass.
  • Philip I. Levy, resident scholar, American Enterprise Institute
  • Clyde V. Prestowitz, president, Economic Strategy Institute

Also today, US Treasury Secretary Tim Geithner is meeting with Chinese Ambassador Zhang Yesui at Treasury, but the meeting is closed to the press. No exact agenda has been released, but it's safe to say the currency will be part of the discussions.

While the currency is cited by US lawmakers and some US corporations as a major advantage for the Chinese, the Obama administration and Congress need to take a look at the US and Chinese tax codes to see a bigger advantage. The Chinese have a corporate tax that is far below the United States.

Currently, the Chinese combined corporate tax is 25% versus the United States 40%. With export incentives and other tax policy, the actual Chinese rate is closer to 12.%-15%. This is a massive advantage for the Chinese. This advantage is almost the exact percentage that critics of the currency peg are calling for the Chinese to appreciate the yuan.

Yes, tax changes appear to be boring and you won't have anyone threatening trade tariffs for media or voter consumption. However, it's likely to be more effective as it will assist US corporations without needing China to act on their currency and without starting a trade war. It will also create jobs and keep US companies domiciled in the country paying taxes.

While there will be a onslaught of currency discussions in the lead up the April 15th Treasury currency manipulator report, Congress should spend more time making the playing field level for US corporations via the tax code rather than the currency markets.

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Andrew B. BuschDirector, Global Currency and Public Policy Strategist at BMO Capital Markets, a recognized expert on the world financial markets and how these markets are impacted by political events, and a frequent CNBC contributor. You can comment on his piece and reach him hereand you can follow him on Twitter at http://twitter.com/abusch.