The Worst Corporate Tax System in the World
"We have by far the worst corporate tax system in the world."
So began today's presentation by a Big Four accounting firm tax partner making the case for transferring intellectual property and corporate operations to friendlier climes overseas. I've written about the awful US corporate tax system before, but let's think about the issue from a new angle.
What would happen if we tried some fundamental transformation of the way the United States taxes corporate income?
I mean, corporations don't really pay taxes, they pass these costs along to shareholders and customers. So why not eliminate income tax at the corporate level, levying profits only when they reach the shareholders? This would allow capital to accumulate in a business, fueling job growth and investment, while eliminating today's perverse incentive to favor debt over equity. We all know the dangers of excessive debt at this point, don't we?
A zero-tax regime at the corporate level would encourage every multi-national in the world to shift assets, intellectual property and manufacturing operations into the United States--the reverse of today's "tax efficient" stance.
Net corporate profits would instantly increase by 25 percent or so in aggregate, fueling an immediate stock market boom, with an attendant boost to depressed 401(k)s and underfunded public and private pension plans.
Small businesses would also benefit, incorporating in droves to allow retained earnings to accumulate and fund enterprise growth. Proprietors would only pay income tax on the money taken out of the business as salary or dividends (the tax on dividend income would be raised to equal the W-2 schedule).
I haven't thought this through very deeply, so please help me out. What do you think would happen if the world's worst business taxation regime became the best?
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Comments:
Jul '10
Re: The Worst Corporate Tax System in the World
George, if I want to hear from shills for greedy corporations, I can go to Forbes.com.
You're the kinda goon who'd distribute millions of genital-bruising toys to American kids and never lose a wink of sleep.
Sep '10
Re: The Worst Corporate Tax System in the World
foreign investment would skyrocket, the economy would improve dramatically, and we would be bombarded with media stories about the widening income gap.
May '10
Re: The Worst Corporate Tax System in the World
Dear Mr. Savage,
Please produce the name of the Wall Street fat-cat quoted at the opening of this piece. Failure to do so will be considered an act of collusion in the capital crime of Encouraging Outsourcing.
Seriously,
The Obama Justice Department
May '10
Re: The Worst Corporate Tax System in the World
...This sounds very reasonable to me. If Republicans are serious about reforming our tax code, they should start with the double-taxing of corporate earnings - and kill the egregious Death Tax permanently, while they're at it.
We need to find a clear way to explain that corporate tax reform benefits everyone. With the media's willing assistance, Democrat attacks against "trickle-down economics" and "tax cuts for the wealthy" are all anyone thinks of when corporate tax reduction is mentioned. And that's before you get to the suggestion of higher taxes on dividends; many voters would fail to understand that removing corporate income tax would mean larger dividends to begin with.
It's a steep hill, but it's one we really ought to climb.
Jul '10
Re: The Worst Corporate Tax System in the World
Maybe we should start by educating young voters. Explain it in terms their empty little minds can understand: $120 of what you just paid for your $400 iPhone went straight to taxes. And your iPad? You don't even wanna know.
Re: The Worst Corporate Tax System in the World
If I expand my operations here in California, my tax rate is 43.9% (federal + state). If I head over to Singapore and negotiate a bit with the government, the tax rate on my non-US revenue is 5% (the world-wide blended rate--best case--is about 19%). Of course, the money that piles up in Singapore from my OUS business can't be repatriated to California without incurring US tax. So guess where more and more of my investment in new R&D, manufacturing and jobs occurs?
I wish I could stay in California, employing skilled engineers in R&D and minimally skilled workers in manufacturing. In ten years time I know that high-school dropout on the manufacturing line will run purchasing, and his son will one day run the entire corporation. But not if we build our products in Singapore.
Aug '10
Re: The Worst Corporate Tax System in the World
Isn't this idea one of the larger selling points of the Fair Tax?
Re: The Worst Corporate Tax System in the World
True enough. The Fair Tax is more ambitious--it calls for abolition of all income taxation, even at the personal level, in exchange for a broad-based national sales tax. I'm advocating a more modest incremental approach: Keep the tax system we have now, just eliminate double-taxation of income at the corporate level. This isn't a suck-up to big corporations--they're already doing just fine by relocating to Singapore, Switzerland and Ireland--but a way to boost private sector job growth here at home.
Jul '10
Re: The Worst Corporate Tax System in the World
George, this should remind us how important it is to elect staunch conservatives.
Let's imagine that somehow, Congress eliminated taxes on corporate income and dividends. After some period of time, as the economy bloomed, Congress would take note of quarter after quarter of unprecedented corporate profits.
And they would have lust in their greedy little hearts.
What harm, they would suggest to each other, to shave off a sliver of those windfall profits for the benefit of the less fortunate? Five percent, say, or ten.
And then, as the revenue yield from those reinstated taxes mysteriously fell short of expectations (calling Art Laffer) - but the revenues had already been spent - well, clearly, those taxes would need to be raised.
Only true conservatives of the libertarian school of economics could be trusted to resist those temptations.
May '10
Re: The Worst Corporate Tax System in the World
I would argue that corporations do pay taxes. I question the ability of corporations to shift taxes onto consumers. It's often argued that corporations raise prices in response to corporate tax increases, thereby transfering the cost onto consumers. This puzzles me. If a corporation could raise prices so suddenly without reducing profits, wouldn't it do so in the absence of such taxes? At any time, corporations adjust prices so as to maximize profits. If taxes increase and demand/supply remain constant, then raising prices will reduce the quantity of goods demanded at that price and consumers will patronize other competitors. Why would corporation X keep the price of its goods at $100/unit and then raise the price to $110 after the imposition of a $10 sales tax? If it could raise prices so casually, wouldn't it have raised its price to $110 already? Also, taxes are a cost to businesses and, as such, could only raise prices if costs rose prices. Yet, do costs affect prices? The cost of producing a spaceship to Mars would be fantastic, but its price as a good for sale would still be nil if there was no demand for it, regardless of supply.
May '10
Re: The Worst Corporate Tax System in the World
George, you have spelled out half of my ideal world taxation system. Not only a zero tax on corporate income, I would also institute a flat tax -- not the Fair Tax -- on all personal income, regardless of income level or source, with no deductions or exemptions, payable monthly only by personal check -- no withholding.