Sanity Injection

Injecting a dose of sanity into your day’s news and current events.

Posts Tagged ‘corporate taxes’

Understanding corporate tax philosophy

Posted by sanityinjection on May 12, 2009

From time to time I’ve posted a few links to columns by economist John Tamny. What I like about Tamny is that he has a nice ability to explain some fairly complicated issues in a way that is easy for us laymen to understand, without gross oversimplifications or descending into propaganda. While I don’t always agree with everything he says, I think he does a good job of laying out the issue in a way that helps the reader form his or her own conclusions.

Here is Tamny’s latest piece discussing federal policy on corporate taxation:

http://www.realclearmarkets.com/articles/2009/05/the_mythology_surrounding_the.html

The one thing Tamny leaves out, which I think is worth reiterating, is that in this era of globalization, it is all too easy for corporations to leave a country with a high corporate tax rate and head for one with a lower rate. Thus, even if one thinks that a high US corporate tax is fair and wise, it will do little good if there are no corporations left to pay it.

We find a good analogy for this in the film industry. Many US states have implemented, or are considering implementing, special tax breaks for television and movie producers who film in those states. Not because the film industry is somehow more virtuous than any other, but because film shoots are engines of economic activity, especially at the local level. In doing so, these states hope to attract film shoots that would otherwise have benefited some other state. And the evidence seems to suggest that the strategy works.

Similarly, why should the US not make itself an attractive location for corporations (and all the jobs that come with them) by creating a tax incentive? Not through the loopholes that exist currently, but (as Tamny suggests) by combining elimination of the loopholes (which the Democrats want) with a general lowering of the overall rate (which the Republicans want). Something for everyone.

There are two basic arguments that get made in opposition to this approach. They are usually couched in much more elaborate language, but what they boil down to is 1) Evil corporations are evil and should be punished, or 2) The federal government cannot afford the lost revenue if the corporate tax rate is lowered.

The first argument does not deserve much effort in the way of rebuttal, although you would be surprised at the number of otherwise intelligent people that espouse it. The second argument is a much more sensible one, but it rests on the assumption that lowering the corporate tax rate would in fact decrease tax revenue. In fact, supply-side economics assumes to the contrary that lowering the tax rate would generate enough additional economic activity to offset any loss in revenue, or possibly even result in a net revenue increase.

Of course, this is the same debate that pertains to tax policy generally, and which side you come down on tends to have a lot to do with your political philosophy. Economists aren’t much help as they come in both flavors just like the rest of us. I think there is sufficient evidence to suggest that lowering taxes can be done without significantly reducing revenues, but I do acknowledge that may not always be the case. With regard to corporate taxes, however, it would seem that the risk of doing nothing, and seeing more capital and jobs leave the country, is greater than the risk of doing nothing.

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Obama Administration to tackle tax code reform

Posted by sanityinjection on March 25, 2009

Bloomberg is reporting that former Fed Chairman Paul Volcker has been tapped by the Obama Administration to head a new “task force” which will make recommendations on streamlining the federal tax code. The panel, which will include former economic advisors from Democrat and Republican administrations, is supposed to report back in December with its findings.

While a good idea, this is nothing new. Commissions of this sort have been formed many times over the years. Usually they present their report, are told “Well done, thou good and faithful servant” and the whole thing gets shelved because the politicians do not have the guts to make the tough decisions.

What is a little odd is the limitations that are being placed on the task force. Normally with this sort of issue, the group is left unfettered to make whatever recommendations it thinks best.  This time, though, the Administration has charged the task force that their recommendations should not include any tax increases in 2009 or 2010 – no big deal since Congress wouldn’t be ready to act that quickly anyway. But they are also not supposed to include any tax increases on families making less than $250,000 a year.

In which case, why even bother? If you really simplify the tax code, what you’re doing is eliminating loopholes and deductions, and every one of those loopholes and deductions saves someone money, whether it be corporations, homeowners, or families with dependent children. Virtually any simplification of the tax code will mean an effective tax increase for a significant group of taxpayers. But tax simplification also means a simpler, fairer process that is easier for taxpayers to understand, and that means money staying in the hands of taxpayers instead of being spent on paid preparers and tax accountants. It also means greater compliance by taxpayers and less work for IRS auditors and investigators. Ultimately, it’s a win for the government and a win for the economy as a whole, which translates to a win for ordinary taxpayers in the long run.

Instead, Obama’s restrictions indicate that his main goal is to force corporations to pay more taxes. That sounds good on paper and makes for good populist-Democrat political copy. But it’s based on a serious lack of understanding of the global economy. The US already has one of the highest effective corporate tax rates in the world. The problem with trying to squeeze more taxes out of America’s corporations is not that it’s morally wrong to ask them to pay more. It’s that if you make their taxation too onerous, they can simply move to a country that is more welcoming – taking their jobs and investment capital with them. How will that benefit the union workers that Obama and the Democrats claim to champion? What are they going to do, raise corporate taxes and then pass a law forbidding corporations from moving overseas?

If the failure of the mortgage industry has taught the Left anything, it should be that you can’t impose a moral regimen of comic-book sophistication on an economic system and expect it to function properly. I’m referring to the pressure that the Left put on financial institutitons to make foolish loans to the economically disadvantaged, who of course couldn’t pay them off. But since they have consistently refused to accept any measure of blame for their role in that debacle, they can’t learn their lesson.

Anyway, don’t hold your breath for anything good coming out of this well-meaning group. It seems clear that it will be nothing more than a token gesture to make it appear that the Administration is tackling the underlying structural problems of our economy, when in fact they are doing nothing of the kind.

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Let the disinformation begin, Part II: Corporate taxes

Posted by sanityinjection on August 18, 2008

Last week, a number of major media outlets, including the Associated Press, filed stories with headlines like this: “Most Companies in U.S. Avoid Federal Income Taxes.” The basis for these stories was a report from the Government Accountability Office showing that, in fact, 60 to 70 percent of American companies pay no federal tax in a given year. Certain legislators, inclduing Speaker of the House Nancy Pelosi, seized on this as an argument for increasing taxes on corporations. So what’s wrong with all this?

Proving that a little knowledge is a dangerous thing, none of the news stories or left-wing legislators bothered to ask the question of *why* so many companies pay no federal taxes. The answer is very simple: The vast majority of “companies” in America are small businesses, many of which in any given year do not make any profit, and therefore do not pay any taxes. What little money they make is generally paid out to the owners as wages rather than having to be taxed as a dividend. For larger corporations, 75% do pay federal tax in a given year, and of the ones that don’t, they usually end up paying the following year.

The point is that in this case the media, and legislators like Pelosi, are either guilty of deliberately misrepresenting the facts in order to justify their goal of raising taxes, or they are badly uninformed and rushing to judgment based on insufficient information. I’m not sure which is worse.

The following article, although written by a very partisan source, explains the problem in detail. The issue is not that you can’t advocate for raising taxes, but if you’re going to do that, it shouldn’t be based on inaccurate information or deliberate falsehood:

http://bloomberg.com/apps/news?pid=20601039&sid=aJHKNW1lro9Y&refer=columnist_hassett

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