Corporatism / Socialism

[samclem]

Before you jump on the we need less taxes, it is worth remembering that a country like Somalia have a very low effective tax rate but even lower economic activity.

??I'm missing the point on this one. I'm fairly sure high or low taxes had nothing to do with how Somalia turning into a cesspool. And I don't think anyone would say that low taxes are a sufficient condition for economic prosperity.

While it's true that, in a closed system, whether we tax individuals or corporations might not matter much. But, we don't have a closed system, and corporations in low-tax countries have a decided cost advantage over corporations paying higher taxes. It can make a big difference in a highly competitive global economy, and I don't think saddling US corporations with higher tax costs will help them win out against foreign competitors paying a lot less. There's a reason European governments have chosen to lower their corporate tax rates.
Edited to add:


(From the CATO institute--warning: vertical axis potentially misleading)

 

[samclem]

The perplexing thing to me was - if they 'got it' this time, why don't they 'get it' in regards to all corporate taxation? And I still think a creative, well-spoken politician could get this point across - if they wanted to.

During his campaign, the President suggested cutting corporate taxes, and correctly observed that the US rate was the highest among industrialized countries.

Here's an analysis prompted by his proposal.
It seems, though, that he believes not so much in cutting the corporate rate because that, in itself, would be good, but only in exchange for reducing loopholes and exclusions. In other speeches, he mentioned that the lower corporate rate would be targeted, going only to companies that do certain things. In other words, he sought not to reduce loopholes but to create new loopholes and complexity.

 

[ERD50]

Before you jump on the we need less taxes,

So let's get that out of the way first - let's shoot for a tax revenue neutral comparison then. OK, it's out of the way.

I have to admit that while I am no fan of raising corporate tax rates, I am not sure why the are any worse than other tax.

If we replaced all of the revenue generated by corporate taxes with say income taxes or even a sales tax, the economic impact would be similar I think. In particular an income tax would lower the demand curve as people have less money to pay for things.

OK. The tax revenue has to come from somewhere - and if it isn't businesses it must be consumers. So from that standpoint it would largely be a wash. But...

1) A Corp tax is regressive. I think the majority are in favor of progressive taxation (thought they will disagree on the shape of the curve). So it helps create a more consistent tax policy.

2) It should make our products more competitive in foreign markets. That should help overall, rather than hurt. More local jobs.

3) We currently pay (twice!) for businesses to push their cost of tax compliance onto us - example:

Let's say a hypothetical corp normally owes $100M in tax each year. It finds it can hire $10M worth of lawyers and accountants to reduce that tax bill to $80M. Big win for the corp (and lawyers and accountants), a $10M investment returned $20M. $10M net benefit to the corp. Sweet!

How's that look from the consumer POV? Well, since you want to keep this tax revenue neutral, the consumers will need to come up with the $20M lost taxes and only get $10M net reduction in the price of goods (assuming the best case that all the savings is passed to the consumer). So consumers are out $10M. It went to the non-value added wages of those lawyers/accountants. We should have those talented lawyers/accountants working on value-added deals.

And it costs a corp plenty to simply comply with the tax laws. Consumers pay that in the price of goods, and again, it is non-value added. Not good for the country at all.

So yes, I'd rather pay a tax than to pay someone else to pay that tax plus pay their costs to pay it, plus pay their costs to figure out how to avoid paying as much as they legally can (intentionally circularly worded, as it is a circular condition).

-ERD50

 

[clifp]

My point about Somalia is that some level of government expenditures is beneficial for the economy. The government needs to collect revenue to pay for these expenditure, although we do seem to be running a grand experiment in providing government services without paying for them...

As for the Corporate tax being regressive, I am not really convinced. Compared to raising in the payroll tax, a VAT I'd say a corporate tax is progressive. Certainly we could structure corporate taxes to be somewhat targeted to rich folks, i.e. a special tax on luxury goods yachts, expensive cars, Coach Bags. Although traditionally when make targeted taxes we do it on particularly dumb fashion, like a special tax on oil companies, or big box retailers that start with the letter W, which directly impact poor people.

At a macro level a corporate taxes reduce corporate profit, which we discussed/demonstrated in the thread. I contend that main beneficiaries of higher corporate profits are wealthy people in the form of higher stock prices and higher dividend payments. So in that respect I think corporate tax is pretty progressive.

I agree that higher corporate taxes do make US corporation less competitive and encourage multi nationals to move as much work offshore as possible. I think this is a strong argument in keeping corporate taxes low.

ERD point about the cost of corporate tax compliance is a really interesting one which I haven't thought about before (or actually heard). Clearly it is huge, I think Buffett said Berkshires tax return was 50,000 page..

However, the flip side to reducing or even eliminating corporate income is that will create a new cottage industry in people creating fake corporations to avoid paying taxes. Right now the system more or less works as intended. Most professional Dr. lawyers, and CPA along with many small business are organized as S Corporation and there income is passed through and they pay regular income taxes. Now there are some abuses, cars, computers, cell phones, a season tickets that primarily benefit one person being written off as a business expenses. This abuses are relatively minor and very little incentive for small business to incorporate as a C Corp and subject themselves to double taxation.

However, if we eliminate corporate income tax, there would be a high incentive for
not only professionals/small business to incorporate but even for somebody like myself. I could open Paradise Financially Planning, pay myself a modest salary and enjoy the benefits of company, car, computer, cellphone and office all tax deductible.

I think the trick is to balance corporate and individual income rates to prevent abuse.

Now I really don't have a clue how close we are currently to being in balance.

 

[ziggy29]

Now I really don't have a clue how close we are currently to being in balance.

I don't think we should heavily rely on any single type of tax. Not only will it make it easier for these "cottage industries" to spring up and allow some of the most well-heeled individuals and/or corporations pay very little in that type of tax, but not all circumstances are the same and this would result in people with similar incomes having widely different tax burdens because of the specific configuration of their life.

I'd rather see moderate levels of all types of taxation -- personal income tax, corporate income tax, sales taxes and/or VATs, *maybe* property tax (though I really hate that one), that sort of thing. That seems harder for a household or a business to easily escape... and more likely evens out the tax burden for two random households with similar means.

I'm all for tax simplicity, but tax fairness and avoiding systems where taxes can easily be avoided (particularly by the wealthy) are also concerns.

 

[ERD50]

Some good points clifp, I think I can partially answer some...

As for the Corporate tax being regressive, I am not really convinced. ... Certainly we could structure corporate taxes to be somewhat targeted to rich folks, i.e. a special tax on luxury goods yachts, expensive cars, Coach Bags. Although traditionally when make targeted taxes we do it on particularly dumb fashion,

I agree, I don't like 'targeted' taxes - too many unintended consequences.

At a macro level a corporate taxes reduce corporate profit, which we discussed/demonstrated in the thread. I contend that main beneficiaries of higher corporate profits are wealthy people in the form of higher stock prices and higher dividend payments. So in that respect I think corporate tax is pretty progressive.

Corporations can't raise their prices now to increase profits, or they would. The reason they can't is because their competition would undercut them and take their business. If we cut corp taxes, we cut their competitors costs too, so they will cut their prices - and as you have pointed out, if we raise taxes on individuals to make this revenue neutral, consumers have less money to spend, so the whole supply/demand curve should balance out at this new lower level.

ERD point about the cost of corporate tax compliance is a really interesting one which I haven't thought about before (or actually heard). Clearly it is huge, I think Buffett said Berkshires tax return was 50,000 page..

I think the fairtax.org people have some numbers on the cost of compliance, have not looked in a while.

However, the flip side to reducing or even eliminating corporate income is that will create a new cottage industry in people creating fake corporations to avoid paying taxes.

Hmmm, hadn't really thought about that one. I will need to mull it over, but on the surface it does seem like any money that is taken out of the corp and goes to individuals would need to be taxed. I guess taxing dividends is fair game, as we have now eliminated the 'double taxation' effect. Any salary drawn would need to be considered income. Maybe it gets tricky if someone builds up cash in a corp under the corp name, they would be deferring taxes on that and on the earnings. But they'd pay when they take it out, and with progressive tax rates, it might be better to pay as you go to stay in lower brackets? Maybe this isn't so big a deal, maybe we could make the investment income taxable?

-ERD50

 

[Independent]

I guess taxing dividends is fair game, as we have now eliminated the 'double taxation' effect. Any salary drawn would need to be considered income. Maybe it gets tricky if someone builds up cash in a corp under the corp name, they would be deferring taxes on that and on the earnings. But they'd pay when they take it out, and with progressive tax rates, it might be better to pay as you go to stay in lower brackets? Maybe this isn't so big a deal, maybe we could make the investment income taxable?

-ERD50

IMO, more than "fair game", I'd say a "necessity". I think it would be a good idea to replace corporate income taxes with an increase in tax rates that brings taxes capital income up to the same rate as labor income.

Partnerships, sole propieters, and S-corps already pass the business income through to the individual return. Maybe there would still be C-corps where we would tax dividends and capital gains when they are received, maybe it would be better to tax all corps on a pass-through basis.

 

[ziggy29]

IMO, more than "fair game", I'd say a "necessity". I think it would be a good idea to replace corporate income taxes with an increase in tax rates that brings taxes capital income up to the same rate as labor income.

*** If *** corporate taxes were to be eliminated (or if business could deduct dividend payouts as a tax writeoff), then yes -- the justification for preferred treatment of dividends on personal income tax returns would be eliminated and dividends would be taxed as ordinary income. But as long as the corporation has paid taxes on the profits distributed as dividends already, it could be argued there should be *no* personal income tax on dividends. Having said that, I'd rather see it taxed as personal income than as corporate income.