What's The Straight Dope on Corporate Income Taxes

Great Debates
1

I debated whether to put this in GQ or GD, but I love a good debate, and figure GD will be less constraining to the conversation.

Over the years, I have heard many on the right claim that our (US) corporate income taxes are the highest in the world at 35%, and that makes us less competitive. However, I also hear stories about large, profitable corporations like GE, Boeing, and Verizon paying little or no taxes due to the complexity of the code and the permissive deductions. I have also seen claims made that the portion of federal revenues from corporate taxes has declined by about 2/3 since 1950, even while payroll taxes have risen by a commensurate amount.

However, it seems to me that the impact of corporate taxes have two distinct aspects, one relative and one absolute. That is, reducing corporate taxes may free up money for economic growth (i.e., expansion, hiring) in its own right- the absolute impact. But if the rest of the industrialized world has a similar rate, then competitiveness is not reduced by this rate- the relative impact.

So I have some questions which probably don’t have absolute answers, but I am eager for the debate that is likely to follow. I will state my opinions at the end.

-How does the US corporate tax rate compare to the rest of the industrialized world, both in terms of the stated rates, and the rates after the application of legal deductions, credits, etc? That is, if the US starts at 35%, but commonly available deductions and strategy make 20% a typical effective rate, and German law starts its rate at 25% but is more stingy and only allows a “typical” reduction of 5%, well, that may be a distinction without a difference.

-Do we know the impact of shifting the burden from corporation to individual? If we assume a relatively fixed federal budget, what do we know about whether it is better to allow corporate or consumer “wealth” drive the economy? Are we better with a 5% corporate tax and a 35% individual tax? The other way around? I realize that some will argue that ALL taxes AND federal spending need to drop, but for the sake of this discussion (and in line with my lifelong observations) let’s please not go there. Again.

I have a suspicion that most of the industrialized world has similar effective corporate tax rates, with a few differences around what deductions are favored. For instance, I can imagine Germany allowing deductions favorable to manufacturing, while someplace else might favor R&D more. But I readily admit I don’t know.

Also, if it could be shown that shifting the burden more to one group or the other was in the interest of the greater good, I could get behind that. However, there seems to be an assumption that any “extra” money in the hands of corporations necessarily gets “used.” But it seems to me that most of it gets saved or sequestered. If GE’s stock price doubles, I don’t imagine that they declare it factory building time, unless there was already a perceived need for which they were having trouble arranging financing.

As an aside, I never liked the term loophole when used to mean deductions. Deductions, such as R&D, are very intentionally allowed. “Loophole” implies that one is taking advantage of something in a way not originally intended.

I hope that wasn’t too incoherent.

2

Despite that "scary " rate of 35% that conservatives cite no global company pays it. They shift “net income” into low tax countries like Ireland. And Ireland is even suffering the costs of rate/tax whoring today.

3

According to the GAO, US corporations pay an effective tax rate of 12.6%.

4

And even so, they don’t get to that rate for free. It’s expensive to hire all these tax lawyers to get there. Better to have a lower rate that people actually pay than have a ridiculously high rate that people spend ridiculous amounts of money to avoid paying.

When the legal rate is very high, there is a very large incentive to not pay it. As the rate gets lower, that incentive also gets lower.

5

Uh, this isn’t so much of a “no” as a so what?

No financially prudent individual seeks to attain “acceptable” tax rates. They seek minimum tax rates. Period. Tax is an expense, and the only reason you’d ever agree to pay higher taxes is because paying lower taxes has an equivalent expense that crops up somewhere else (say, lawyer fees or risk [which is why there are so few corporations using Somalia as a tax shelter]).

Unless you’re advocating that the US adopt the tax rate of the country with the lowest rate (adjusted for the miniscule lawer fees - and lets face it, Coca-Cola makes billions in revenue having a staff of a few dozen lawyers isn’t a drop in the bucket - plus risk), cutting the tax rate wouldn’t do anything.

So what if the incentive is lowered? The objective is still “minimize expenses.” That’s basic business!

And have you (not you John Mace, just “you”) ever compared the relative prosperity of 1st world nations with “scary” tax rates and “happy” tax rates? Do you really want to compare the prosperity of systems like those found in Scandinavia with Ireland?

Not exactly, but it’s fairly bad. Scratch the corporate tax and a savy investor is never paying anything but capital gains taxes sometime in the future. Actually, considering Warren Buffet, this is already pretty much true, but at least his corporate taxes means that the Buffet Rule isn’t entirely true.

Basic economics would tell us that it’s better to have rich masses than poor masses and rich corporations. Put simply, the masses eat more.

Far better to have a mixed balance, but taxes on individuals tend towards being regressive while taxes on corporations tend to be progressive. Remember, a lot of wealth is tied up in corporations. What is it, something like 70% of wealth is owned by the top 20% of America? I don’t have the exact figures for that, or the following - a huge chunk of that is tied up in corporations. In short, poor people don’t generally own stocks. Everybody, from the burger boy at McDonalds to the CEO of Kellogs has income. It’s just the poorer ones who depend exclusively on that income.

Truth is, I hate corporate taxes. They’re icky. But they’re necessary to have a functioning society, that benefits everyone and that’s more important than my pocket book. So icky though they may be I’ll still give them a warm hug any day.