Free Markets, Free People

Corporate taxes: We’re number 1

As of April 1st, when Japan officially lowered its corporate tax rate, we took over the top spot in the world, as James Pethokoukis points out:

With Japan officially cutting its corporate tax rate as of today, America now has the highest rate among advanced economies. Even its effective tax rate is way above average despite the likes of General Electric spending billions to game the labyrinthine code. A smarter approach would be to substitute a business consumption tax.

Now the United States might cling to second place if Japan cancels the rate reduction to help pay for the tsunami and earthquake devastation. After factoring in state taxes, America’s top rate of 40 percent would still exceed the average of 26 percent for the rest of the OECD.

No, it’s not an April fool’s joke.  We do become the nation which taxes corporate entities the most in the world.   As Pethokoukis also points out, tax rates are like sticker prices on cars – the real tax is significantly lower than that.  But in our case, even with the $40 billion in compliance costs, etc. spent by corporations to lower their tax bill, we still remain the highest corporate tax rate in the world:

Headline rates, of course, are like sticker prices on new cars. The real numbers are lower, thanks in part to the $40 billion companies spend annually to comply with, and often sidestep, the maximum levy. GE, for example, has taken heat for consistently paying less than what the U.S. tax code would imply it should.

But even taking into account the efforts of attorneys and lobbyists, the average effective U.S. rate in 2010 was 29 percent against 21 percent for international counterparts, according to the  American Enterprise Institute. And before the recession, corporate tax revenue as a share of U.S. GDP was at its highest since the 1970s.

“Competitive” is a word politicians like to throw around.  But their tax rate is non-competitive.  It is a factor that weighs heavily on where a business may choose to locate.  Or relocate.  So while we maintain the highest corporate rate in the world, we see politicians mouthing off about punishing corporations that “outsource” jobs.  It is a reaction to a problem government has created and now government talks about punishing those who react rationally to their tax rate?  Amazing.

Secondly, as we’ve said ad nauseum – corporations don’t pay taxes, their customers do.  The corporation, for the most part, simply acts as a means to pass those taxes (incorporated in the price of the good or service produced by the corporation) on to the Federal government.  Any tax rate increase in the corporate world is a tax increase on the customers of that corporation. 

What effect would lowering corporate taxes have?  Pethokoukis lays out the litany:

Politicians of all stripes have been talking about lowering corporate taxes and eliminating loopholes to pay for a sharp rate reduction.  A sharply lower rate —  Canada’s will be just 15 percent in January 2012 — would boost worker wages, investment, productivity, jobs and growth. Such reforms, though a big improvement, would still leave in place a flawed and unwieldy structure.

Like the rest of our tax structure, the corporate tax system is in bad need of reform.  And yes, it’s just another problem among a galaxy of problems that most likely won’t be adequately addressed.  That’s not to say some aren’t trying.  Pethokoukis points out an alternative that will, apparently, be introduced by Rep. Paul Ryan in the GOP’s budget plan for next year:

A better alternative might be a consumption tax where business would simply determine its liability by subtracting total purchases from total sales. The tax would then be imposed on what’s left, essentially a firm’s value added. Unlike the corporate income tax, a consumption tax would allow the cost of investments to be fully deducted immediately, providing incentives for more. Such a tax also could be imposed on imports and deducted from exports, as other nations currently do with their VATs.

The Tax Policy Center estimates an 8.5 percent consumption tax — by broadening the tax base and boosting output – would boost corporate tax collections as a percentage of GDP to 4.5 percent from the 2.4 percent the White House forecasts for the next few years. (This is the corporate tax plan, by the way, found in Rep. Paul Ryan’s “Roadmap for America’s Future.”)

If we have to have a tax, this seems eminently more workable and less onerous while not killing competitiveness or having corporations seeking other places to locate.  And the obvious bonus is  it boosts revenue for the Fed – used hopefully to pay down debt, not enact some pie-in-the-sky new entitlement we can’t afford.



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24 Responses to Corporate taxes: We’re number 1

  • After FOO (Friend Of Obama), GE, reported no taxes, the whole idea of corporate taxes became clearly, a tax for the little corporations.

    • GE paid no tax because in 2006-2008 they had huge losses which ALL companies, Fortune 500 as well as Mom & Pop Eateries, can carry forward. They also had enormous R&D capitalization->expense, which again, ALL corporations are entitled to.

  • As a general rule, no business entity pays a tax.  They merely act as unpaid collectors of the tax, levied on the customers of the business…with liability.
    But, since it has to be subsumed in their pricing, this has the effect of making US corps. less competitive in the world market, as noted.
    One feature of a consumption tax (which I favor IF the income tax is killed) is that it would allow SOME compensation for the tax collecting function a business is compelled to perform (i.e., interest-bearing trust accounts the tax is held in until paid).

  •  “…business would simply determine its liability by…”

    There ain’t no such thing as simple when it comes to tax law. Clausewitz’s dictum about even simple things becoming difficult also applies to tax law. 

    • Actually, there are some very simple tax codes around…even in the U.S.
      In support of your observation, though, I have had to come to the belief that a concerted effort was required to make the Income Tax code as awful as it certainly is.  That is not a joke.

      • The tax code is one of the major venues for congress to assert power. That is all that is needed to explain the complexities of the tax code.

  • “It begins with us … and we failed .. EPIC”

  • A sharply lower rate… would boost worker wages, investment, productivity, jobs and growth.

    This is one paradigm for the relationhip between tax rates, government spending, and national prosperity*.  Unfortunately, it isn’t the only one, and is certainly not the dominant one.  The others are:

    (A) A sharply higher rate would reduce or eliminate the federal budget defict while sustaining the social safety net, ensuring equitable financial outcomes for all Americans, protecting the environmant, and boosting investment in new technologies, all of which lays the foundations for a stronger twenty-first century America.

    (B) Well, corporations ought to pay taxes, because it isn’t fair that those corporate bigshots get to fly around in fancy planes while they lay off workers.  They ought to pay!  But, like, we can’t tax too much, because… um… this makes some corporations outsource to India and, like, lay people off.  Which isn’t fair, either.  Maybe we should throw those corporate fatcats in jail, or make people buy stuff that, like, is made in the USA.  Then we… um… like… ZOMG!!!!  Can you believe who got voted off last night????  I TOTALLY did not see that coming!  Wait… what were we talking about?

    Such reforms, though a big improvement, would still leave in place a flawed and unwieldy structure would make it far more difficult for the president, Congress and bureaucracy to reward their contributors, punish their “enemies”, and otherwise treat the US economy as their personal Monopoly game, so they ain’t about to make them.
    Fixed it for him.


    (*) Indeed, I suggest that there is a pretty wide difference between how the left and right define “national prosperity”.  Try this: given a choice between 19th century Britain and modern-day Cuba, which do you think is the more “prosperous” nation?  Which model is the closest to what the the United States should adopt?

    Given the success of the movie “Sicko” in certain circles, I think I know how the left would answer.

    • Doc, please see my last post under the Jones issue.  I think I managed to make myself misunderstood.

      • Let me make sure I’ve got it: basically, you were playing devil’s advocate, i.e. how one MIGHT excuse the mayhem over that damned idiot burning a copy of the Koran.  You do NOT excuse them yourself, however.  You also lament Jones’ action and wish that he had been responsible enough to refrain from a stupid though not illegal act.

        I think we’re on the same page.  I also made a couple of other comments on the thread itself.

  • 1. The sticker price of a car is a starting point for two independent parties to negotiate a sale. If they can’t reach an agreement, the deal does not happen. How is that like paying taxes? Other than moving offshore, a taxpayer can only make legal moves to minimize his taxes. He can’t walk away if he is not satisfied. The analogy is false.
    2. A rational person should admit the obvious, as noted by Ragespierre, business taxes are paid by the customer. Since we don’t live in a rational world business taxes should be simple and efficient. I have no argument against some sort of value added tax as an alternative to the current business tax system, personally I favor a small gross receipts tax. It keeps us out of the weeds regarding all the costs and differences between business types. The calculation would be similar to the proposed individual flat tax. Take your gross sales and multiply that number by 5%. Send that amount to the IRS. Some argue this would be unfair to businesses that lose money. But really, what’s the difference between the “cost” of taxes and the cost of sales. If you’re not making money, maybe you should reconsider your business model. It would also eliminate a universe of tax dodges, which is why something like it would never be considered.
    3. As much as I’m a fan of free speech politics, I’m beginning to believe that the only source of money in politics that should be allowed is individual money. No more PACs, all political donations to candidates or parties should come directly from individuals. And I would also ban the practice of politicians donating money from their coffers to other candidates.

    • Not to mention, if I am car shopping I will start with sticker prices. Sure, maybe GE can understand what the “real” tax rate is, but how about some small to medium size Italian firm considering a North American subsidiary? Canada might just look much better.
      Also, a prediction…Obama will float a balloon about fixing the corporate tax rate…just like he did a few months ago, before the mid-terms, and just like Kerry did in 2004. They are not serious about it. Its just a way to attract a few votes for free, like Bush’s “mars” plan.

      • I am absolutely convinced that Dear Leader will fundamentally revise the tax system…
        just as I know he will encourage domestic oil production, and building of nuclear power plants will begin in 3…2…

      • That’s part of the $40 billion spent on compliance costs – the Italian firm is compelled to hire experts in US corporate tax laws to aid them in their decision.

        • Canadians are trending more conservative.
          If I were considering a location for any new investment in Norte America, I would not consider the U.S. under Obama.

          • Locating in Canada allows foreign companies to take advantage of NAFTA trade rules. Win-win.

    • “And I would also ban the practice of politicians donating money from their coffers to other candidates.”
      Yes, this seems sensible. They could have several choices of what to do with any funds they did not need:
      1) Return to their donors, on a chronological basis from the last donor until the funds run out.
      2) Contribute to the United States Treasury.
      That’s it. Otherwise they will find a way to funge it to do something evil. No.1 seems the fairest.

    • No business income taxes at all. Revamp the legal business entities to support this.  Tax personal income and gains only.  Earnings can then sit inside the corp until paid out as dividends or personal compensation.  Maybe I’m missing a big problem with this, but this would be very simple.

    Oh, sure, that’ll work…!!!!
    The Western states will leave before they let much more get locked up by the Feds.

  • I dislike a VAT  becausee it is not visible to the people who actually pay it – investors, consumers and workers. That’s why VATs in Europe go up and up.
    I strongly prefer a progressive personal consumption tax to replace all corporate and personal income taxes. Essentially you take your income, subtract your savings and the difference is your consumption. The more you consume, the higher your tax rate. E.g., the first 20k is tax-free, but after that the rate goes up, but big spenders pay 100% (that 100M yacht would then cost 200M). Much simpler, fairer, end of a lot of lobbying (no corporate tax) GE could dump its 975-person tax department, etc.

    • I think this idea with a flat tax rate, not a progressive one, would be much more fair and beneficial to the economy.  The 100% rate at any point is simply destructive and classist.

    • LarryI dislike a VAT  becausee it is not visible to the people who actually pay it – investors, consumers and workers. That’s why VATs in Europe go up and up.

      Yes.  The quandry is making a tax that is totally transparent.  Easy to do with people (“You made $X last year; on April 15, we expect a check for Y% of that amount.” xoxoxo The IRS), but harder to do with corporations such that their customers can see the effects.  This is why I have a problem with gasoline taxes: people only see the price at the pump but don’t see that some relatively large fraction is tax; this makes it easy for politicians to demagogue the oil companies when they are directly responsible for that fraction of the price.  A VAT would be the same, but on EVERYTHING.

      • …I have a problem with gasoline taxes: people only see the price at the pump but don’t see that some relatively large fraction is tax;”

        Right now, gas pumps have stickers announcing the tax, but they are vague at best (by design?).
        How about mandating a sticker that says something to the effect, “Price includes 14.8 cents per gallon Federal tax and 32 cents (or whatever) State Tax per gallon. This combined tax is 15 cents more per gallon than the profit realized by the petroleum producer”.

  • Here is an interesting piece.
    The Real GE Scandal

    It’s not that the company won’t pay any 2010 U.S. income taxes. It’s that we don’t know how to tax global business.