Not true.
Here are some positive effects:
-
Currently, a lot of the money that corporations are sitting on is parked offshore for tax reasons. The reason it’s parked offshore is because it was earned offshore. The reason it was earned offshore was partly to avoid U.S. taxes. Therefore, we can assume that much of that money would come back to the U.S. Hundreds of billions of dollars worth.
-
Manufacturing facilities that moved offshore because taxes pushed the marginal value of offshoring high enough would return to the U.S. over time. Plans to offshore more manufacturing would slow down or reverse.
-
More corporate investment would be made in the U.S. by foreign companies for the same reason U.S. companies invest in production elsewhere - to avoid taxes.
-
The deadweight loss of taxation, once removed, would create demand for products on the margin. U.S. goods would drop in price. This would make them more competitive on world markets, and U.S. exports would increase.
-
If you made up the revenue with a VAT, you would increase the cost of domestic consumption. But you also lowered the cost of domestic production. This would bias the market towards American products, and would encourage more personal savings since consumption is taxed. This would help correct America’s huge balance sheet problem.
-
The competitive marketplace would be biased towards the companies that currently enjoy the fewest tax loopholes - typically smaller companies.
I know many on the left simply assume that tax reductions would be gobbled up by the business owners and they would become wealthier. But that’s simply not the case. The market does not work like that. If you need proof, all you have to do is look at the history of positive price shocks - industries where prices rapidly fell for materials or labor. There is no difference to a corporation if it sees its cost structure fall by $100 million because of a tax cut or because the computers it depends on fell in price by 50% or because new open-source software saved them $100 million in licensing fees.
That money doesn’t get absorbed by the capitalists for the same reason they don’t maintain 50% profit margins now - competition drives down prices. If Apple doesn’t have to pay any corporate tax, then neither does Microsoft, Dell, or anyone else. If Apple takes its ‘extra’ money and blows it on hookers and blow for the executive board, Dell will lower their prices and undercut Apple. Then so will all the other device makers. Eventually, the industry will settle out at the point where profit margins are about where they are today.
This is actually the pattern that is occurring around the world. Countries are lowering their corporate taxes and raising more money through consumption taxes. So when a foreign product comes into America, there is less tax built into to the production cost, so the price of the import is lower. Then American products which have a larger tax component have to compete against it. Essentially, by moving to a value added tax and away from corporate taxes, the citizens of other countries are helping their own corporations compete better in the world markets.
I don’t know about eliminating corporate taxes completely, but they should be lowered and simplified. Get rid of all the tax loopholes, and use that revenue to lower the overall rate. Make everyone compete on an even playing field, and you’ll get a more optimal mix of goods and services. Then, institute a 5% VAT, and use that revenue to drive down corporate taxes further. Wherever you land, that’s what the rate should be.
Liberals are fond of pointing out that the marginal tax rate in the U.S. might be high, but the effective tax rate is low. And that’s true. But it’s true because corporations expend so much of their effort avoiding taxes - in part by moving operations offshore and out of the American economy. The goal should be to at least be on an even playing field with the big competitors in the world, without the loopholes lowering the effective tax rates.
Let’s look at the corporate tax rate for some of America’s biggest competitors, taken from the table on this wiki page Tax Rates Around the World. This list shows total corporate taxes (i.e. for Canada it includes federal corporate taxes of between 11% and 16.5%, and provincial taxes from 2% to 16%):
From lowest to highest:
Hong Kong: 16.5%
Canada: 13-32.5%
South Korea: 13-25%
Singapore: 17%
The United Kingdom: 21-16%
China: 25%
Mexico: 28%
New Zealand: 28%
Germany: 29.8%
Australia: 30%
Italy: 31.4%
India: 33.2175%
France: 33.33%
Japan: 40.69%
United States: 0-47%
Here’s something for progressives to think about:
Just what kinds of corporations do you think pay the lowest amount of tax as a percentage of profit? Answer: The ones big enough to open foreign subsidiaries, hire buildings full of tax attorneys, pay for government lobbyists to jigger the tax code, or who can move operations into low-tax jurisdictions.
Who do you think pays the 47% or close to it? Small corporations. Local corporations that hire local people. Firms that happen to be in industries that the government has singled out for tax credits and subsidies.
A steeply graduated tax code punctuated with loopholes that lower effective rates only for the biggest, most manipulative companies closely tied to the government is a bad thing. The big corporations love it - they get the shelters and the tax rebates and the incentives, and this allows them to out-compete the smaller firms and startups. It stifles innovation, slows job creation, and help keep small companies in America from competing in the export markets.
The U.S. has a tax code that’s been rigged by the same crony capitalists that have rigged the regulatory codes and arranged for big subsidies for themselves. As a progressive, you should want to eliminate this system with a passion, and go to a flatter, lower corporate tax structure.
Also, one of the reasons the U.S. had one of the biggest asset bubbles before the crash and had one of the lowest personal savings rates (0%) is because almost every other country in the world taxes consumption, which helps moderate bubbles and which stimulates savings.
The U.S. tax policy is a real outlier in the world now, and not in a good way. You need to make the tax code flatter, eliminate exemptions, tax consumption, and stop taxing production so much. You need to get your economy away from consumption and back towards production, get rid of your current account deficit, and make your products more attractive to the world. That does mean flattening the tax code, but it doesn’t mean your fatcats will get richer as a result. Canada has a flatter tax code than you do, and our GINI coefficient is lower.
Those are the reasons you need to seriously reduce corporate taxes.
Speaking as someone typically described as “on the left”, I’ve been trying to beat this into the heads of my political allies for years.
The biggest objections are twofold:
- “We can’t trust the types of people willing to reduce corporate tax to properly pass the VAT needed to make up revenue, they’d be more likely to just let taxes be low and try to starve out the government.”
- “VAT, like all consumption taxes, disproportionately hurts the poor.”
The first objection is a real concern in the age of the Tea Party, but I can see numerous ways around the second objection (like, for example, forgiving VAT on the first $X one spends on consumer consumption in a given tax year) but they all involve either some abstraction or some fairly serious/annoying accounting.
From the IRS website:
Usually.
Eliminating the corporate tax entirely would be a mistake. Not only would it lead to padded expense accounts, it would create enormous potential for abusive tax shelters. [1] Plus, there’s no reason why shareholders shouldn’t pay a price for limited liability: if they don’t like it, they can form a partnership.
US corporate rates might usefully be lowered though. But recall that while corporate taxes are lower in Europe, the tax burden on the highest paid earners is higher. Republican calls to lower the corporate income tax are a transparent attempt to pamper their donor base.
Ultimately though, corporations are legal fictions: they don’t pay taxes, people do. But figuring out just who gets ultimately pays for that tax is apparently beyond the ability of the best tax analysts. It could be worker, CEO, consumer or shareholder: nobody has persuasively parceled that out.
[1] Cite: Joel Slemrod, taxation expert, (re: encouraging abusive tax shelters).
How do the stockholders and executives realize any sort of a giveaway unless they get paid, in which case the money’s taxable as personal income?
They do get paid some of the money, if a dividend is paid. But it is taxed as capital gains at a much lower rate, not personal income. The bulk of the savings is retained as cash by the corporation.
Then the bulk of the savings won’t be a give away for any stockholder or executive.
And while corporations are stockpiling cash these past few years, that won’t contiue; the stockpiling phenomenon is a response to uncertainty. Sooner or later someone wants to get paid.
This gets repeated a lot and needs to be cleared up:
Capital gains are broken into two periods short and long. Capital gains made on stock held less than one year are taxed at your ordinary rate. For gains made from stock held longer than a year the rate drops to 15% for everyone except those in the bottom two income brackets. For them long term capital gains taxed are zero.
Qualified dividends get taxed at 15%, but that requires you hold the stock for longer than 60 days (90 for preferred stock).
The past thirty years have seen corporate profits and CEO pay skyrocket while it has stagnated or declined for everyone else.
As a consequence, there was a lot of extra money floating around that they had to do something with. The US domestic market did not look as good compared to many other potential investments, such as the ever increasing derivatives market and other paper investments. Then there is the emerging markets around the world that they can invest in as well.
Giving them tax cuts, even if there was demand in the US, even then, will not create jobs if there are better investments abroad in other countries. You’ll only be giving them more money to play with on other investments.
This latest article from the Wall Street Journal tells as much.
http://blogs.wsj.com/wealth/2011/05/18/the-rich-are-moving-more-money-overseas/
So the answer to really help America, is to make it expensive to do business with other countries, so that it makes domestic investments more appealing, which can be done in many ways.
If they don’t like the idea of America being first, then they are either free to completely move their headquarters to some socialist or communist run country or deal with it.
We should also cut all military expenses to 0, because it currently only exists to provide safety and security for these financial and business dealings rather than actually protecting the US borders as they should be doing.
Agree that, that would never happen.
A person gets paid based solely on supply and demand, not value.
We have more college educated people in this country than anytime in its history, hence the stagnant and lowered wages. Not too mention an enormous amount of illegal and legal immigrants who are doing those jobs we once used to do in this country and make a living off of it. Those jobs now pay a pittance.
If we had 50 million CEO’s in this country, and no board of directors, you would also see their pay scale drop considerably as supply and demand would dictate.
In this global economy, their pay should be dropping in line with other ceo’s in the global market. But it is rigged in their favor and against everyone else’s favor.