Eliminate corporate taxes?

Great Debates
1

About six months ago, my boss and I got into a discussion about corporate taxes. Now, for some background, my boss comes from old Europe. He self-identifies as a communist, but this is only in the McCarthy sense of the word, he’s just a liberal (i.e-he’s joking). We often sit around and critique conservativism, but since I am still conservative in some ways the discussions are pretty interesting. Anyway. During the discussion, he indicated that he would much prefer it if they eliminated corporate taxation, which he felt was largely unfair and didn’t achieve much. Given that I’ve never heard an unthought-out plan come out of his mouth in the years I’ve known him, I reserved my instant criticism.

He pointed out that it is always in a company’s interest to lower their tax burden. Then he mentioned some ways of lowering a tax burden, like buying someone else’s when a company is going down. Thus, you get lower taxes this year, and whatever intellectual and real capital the company had when it was dying. That’s win-win. He mentioned other ways of avoiding them by less-than-moral means, and indicated that this spelled out two things. One, businesses will tend to grow until they can’t support themselves anymore, and two, that in doing so the number of scandals that come to a head will increase.

I said, Well that’s great, but we need to collect money for the government to run. He then went on to discuss value added taxes with me (which I hadn’t heard about at that time) and I walked away that night well-persuaded that it was pretty much a good idea.

I haven’t really given much thought to the idea since, but lo, the most recent issue of the Economist has an article outlining a very similar idea. Decrease or outright eliminate corporate taxes (which, they argue, in addition to the above points, are inefficient to collect because of the complicated tax-code), but increase consumption taxes through a VAT system which, apparently, are easy to collect and hard to hide from. They further argue that due to the rise of multi-national corporations, even if the companies are making a big profit they can dance around with the numbers so that profit appears in the country with the lowest tax rate, decreasing their burden considerably.

This certainly has some appeal, but I wonder about the flaws of this thinking. My initial reaction, back when my boss mentioned the idea, was that this would make the wealthy hide their income in the corporation, avoiding taxes themselves in the process. What was once a new car for the executive would now be a new car for the company (not that this couldn’t already be done to some extent, of course). Companies could definitely increase fringe benefits in order to hide a person’s real income. Part of my uncertainty also stems from value added taxes. I’m so used to thinking of sales taxes as flat/regressive that I’m not sure VAT compensates. Besides which, even if the US institutes a VAT, how will this counter the argument The Economist made regarding multi-nationals? Won’t they also be consuming in other countries?

Anyone want to put their minds to this topic?

2

Isn’t a VAT a consumer consumption tax? With two-thirds of the US economy coming from consumer spending, would a VAT generate the tax income lost by not taxing corporations? Would consumers rebel knowing they now pay practically all the taxes, but corporate lobbyists still run Washington?

3

Anyone who buys anything would have to pay it, including corporations. So in that sense it is like a sales tax. But again, I am not especially clear on how it is implimented exactly in other nations.

Apart from that, there would be no elimination of personal income tax, which is where inequities in consumption tax can (at least partially) be addressed.

4

My understanding of the VAT system as it runs in England is this:

At any level of commerce, whenever anything is made more useful or valuable, VAT is paid.

A tree is chopped down, and a lumber company pays for it. They turn it into a set of planks and other pieces. Value has been added, since planks are more useful than the raw tree, so a VAT is charged when the furniture company buys the wood. When the wood is turned into a chair, this is more valuable than the unconstructed lumber, so VAT is again charged when the chair is sold, and like that.

It’s basically a tax on the outcome of human sweat or its analog.

5

The economist recently wrote an article on this very issue.

I started reading the article with an air of skepticism, due to my liberal roots, but I actually agree with their thesis. Especially in the international realm, corporate taxes are just becoming a waste of time for everyone involved. It seems that there are far more taxes worth our time, ones we could probably get more money from, and less prone to being evaded. And it’d make it harder to just convince politicians to turn the other way.

6

Yeah, it was that article that made me mention it. :slight_smile: I didn’t link because it is subscriber-only.

7

Seems like a fairly good idea, which means it should be politically dead in the water.

8

I have read (no cite immediately available) that value added taxes require an enormous amount of documentation and calculation, which can lend itself to manipulation. (How many different kinds of materials and services from how many different sources go into making a car, or even a restaurant meal?) Could the same end simply be achieved by a gross tax on all sales, as opposed to the net profit tax (with extensive deductions) that corporations pay now?

9

what would the sales tax increase by under that plan? i dont know how much corporate tax is collected and i dont know how many trillions are spent annually in the US on consumer products.

Also, you can get around consumer taxes too by buying on the internet. If sales tax jumped to 20% or so i assume more people would start buying things online.

10

Er, presumably a federal VAT wouldn’t have the same loophole that state sales taxes do.

11

Why not if I order it from Canada or Mexico? That would be an easy way to avoid it, especially for a large corporation. And there wouldn’t be any tariffs or import taxes, either.

12

You’ve asked one of those questions that’s like whether god exists or whether the U.S. should legalize marijuana–whether we should ditch the corporate tax and add a consumption tax has been argued to death, and by much smarter folks than you’ll find on this board (present company included).

So, I’ll just make a couple of points and duck out.

First, you said:

I think what you mean by that is that your boss said that if Company A has experienced a big loss during a taxable year, then Company B can buy Company A and take advantage of Company A’s loss to lower (or eliminate) Company B’s tax bill.

Your boss is sorely mistaken about how the tax Code works. This is called “loss trafficking,” and it’s highly frowned upon; there are lots of different regimes set up to stop this from happening, and they are very hard to get around (even for folks who get paid the big bucks (or in my case, the medium bucks) to try to get around them). Tell your boss to flip over to Section 382 of the Code if he wants to read about one of these regimes. The short answer, though, is that it just doesn’t work that way, and Company B will not be able to use that much of Company A’s loss to lower its tax bill.

Second, there’s plenty of good reading out there on the relative merits of a VAT versus a sales tax, and almost every card-carrying economist thinks a VAT is just about the worst thing in the world; the basic reason for this is that it causes lots of unneeded distortion in the economy because the tax enters into so many different economic decisions. Advocating the imposition of a VAT will get you tossed out of almost all economists’ cocktail parties.

13

That was exactly what I meant, yes.

Well his point was larger than that Company B will write it all off; it is that it gets to write some of it off and increase its capital and intellectual property. Contrast this to doing nothing with the profits and getting taxed at 50%.

Could you point me towards such critiques? Offhand the VAT seems less distortive than a flat sales tax, but this is coming from 1) the claims given in the article and 2) my admittedly small knowledge of VAT.

14

I can’t back this up with actual numbers. I’ll simply suggest that getting rid of tax loopholes would hurt lots of businesses. To use your example, a corporation buys a car because it’s a tax write off. This means the car dealership gets a sale, and someone at the car dealership is employed. Take away the loophole, and the corporation doesn’t buy the car. Maybe the car dealership goes out of business; maybe the salesman gets laid off. Ironically, the current tax system is sort of socialistic, like welfare with a middle man. Corporations help prop up other businesses with purchases they really don’t need, and the government reimburses the corporations for their spending.

Through black markets, sales taxes can be avoided just like regular taxes. Although it sounds funny, do a Google search for cigarettes taxes racketeering. When you encourage black markets, you also encourage organized crime and violence.

15

And this, of course, is the only real reason to advocate the imposition of a VAT. :slight_smile:

16

I would advocate elimination of all corporate income taxes (and a subsequent increase in personal taxes, be they income or consumption based) for the simple reason that they hide the cost of government from the people. Corporations don’t vote; people do. They should be able to look at the last section of their Form 1040 and know how much the gov’t is costing them for one year. Based on that information, they can make more informed decisions at the polls.

As it is, a good portion of that cost is hidden in the prices of goods.

17

No no no. When I say that Company B will not be able to use that much of Company A’s tax loss to lower Company B’s tax bill in future years, I mean like almost nothing. With interest rates so low now, section 382 would allow Company B to use only about 4% of Company A’s tax loss each year. So, Company B isn’t getting some big windfall because it gets to use Company A’s tax losses; in fact, the tax losses (unless they were just absolutely enormous) would probably be a very minor part of the merger discussions.

I have no idea what the last sentence you wrote means, and I have no idea why you keep mentioning anything about Company B “increasing its capital and intellectual property.” I thought we were talking about corporate taxes; a merger will increase Company B’s property no matter what the tax consequences are.

Suffice it to say that your boss is wrong: it is not the case that corporations are always buying each other to take advantage of a the target companies tax losses.

The story is much the same with other so-called “loopholes.” People think that rich people and corporations are able to get their tax bills way down by doing all sorts of fancy stuff, but the reality of it is much much less exciting.

18

First, I think you’re really overstating my boss’s point, or I am and I’ll try to rectify this here. There’s no corporate conspiracy within the government to give huge breaks to behemoths. He’s just concerned that the tax laws are set up to encourage such spending, not that it compells all reasonable companies to do so. I can write off interest paid on a mortgage; does this mean everyone is seeking to own property to scam the government? Overstated; it just means the government’s tax laws encourage home ownership. Of course there are larger reasons to own a home, as well. But the government’s position is not netural in this case. Secondly, he ponders, “Which businesses can take advantage of this?” The answer: wealthy corporations who could afford the buyout in the first place, and who already have plenty of motivation for doing so.

I hope that has clarified this rather tangential point.

19

Tax distribution is always a thorny issue because ultimately it comes down to personal ethos. Credit where credit is due, however – noone here is falling for the old canard of implicitly believing that where one tax is eliminated, we all just end up paying less tax.

Where corporation tax is concerned, I tend to look at it from the opposite direction. What is tax used for? Education, health (in my country at least), defence, infrastructure. All these things are of benefit to corporations. It therefore makes sense that corporations should share in the payment for these services, otherwise there is a subsidy from the taxpayer to the corporation. Since corporations are, of course, owned by people, there is some overlap of interests. However, the most direct way of ensuring fairness is to tax the corporation itself.

Note that this argument has nothing to do with economic efficiency, for once. But like the debates surrounding the Euro and healthcare, I don’t think you can decide it on pure efficiency arguments.

As for VAT – well, it’s not really popular over here, though people do just accept it as a fact of life. It’s 17.5%, incidentally, although some things are taxed at different rates (for example fuel is something like 5% (from memory) and “staple foods” and childrens’ clothing is VAT-free. I put staple foods in quotation marks because tortilla chips are exempt whereas potato chips are not – the boundary can be a bit blurred. ) Then you have special duties on things like fuel, alcohol and insurance premiums.

I’m not convinced by VAT. It is regressive, it does discourage spending and it does hide the true tax burden. At least you know where you are with a 30% corporation tax.

pan

20

How does it hide the “true” tax burden?? No one has said why this is yet, and The Economist didn’t indicate why it was less distortive. Surely someone, somewhere can actually expand on this topic.