May 24, 2013

TAX WHAT YOU DON'T WANT, NOT WHAT YOU DO WANT:

A Populist Argument For Eliminating The Corporate Tax (Harvey Golub, 5/22/13, Forbes)

Recently, there has been a great deal of discussion about reforming the corporate tax code as one way of encouraging economic growth. Most economists, job creators and even liberal politicians believe that our corporate tax system is uncompetitive with other nations in a number of ways, and thereby holds back investment and job growth in this country.

First, U.S. marginal corporate tax rates are the highest in the developed world.  (Japan's used to be higher than the U.S., but has recently been lowered.) Since corporate taxes can be an avoidable cost of doing business in the U.S. in some cases, high rates encourage businesses to locate outside our country, do as much business as possible in lower tax jurisdictions, and to keep capital abroad.

Second, the U.S. corporate tax code is replete with special deductions and other provisions that reduce average effective tax rates well below the high marginal tax rates for the politically connected businesses or industries that can successfully influence the policy-making process in Washington. For a largely U.S. domestic, non-capital intensive company, the effective rates are very close to the highest marginal rate, and they need to be high to make up for the deductions granted to the more favored enterprises.

Third, this combination of high nominal rates, which affect decisions at the margin, result in excess costs and complexity in running businesses.  The high rates discourage investment projects and require large administrative overhead. Perhaps most importantly, they encourage rent seeking and competitive advantage through the tax code rather than by producing better products. For all these reasons, most corporations have large tax departments and Washington lobbyists whose mandates are to find ways of lowering their corporate tax burden.

Most people believe that corporations pay taxes. They are wrong.  Every economist will tell you that corporations are not people and that the people who own corporate equities ultimately bear whatever part of the tax cannot be passed on to others. The true incidence of the tax on owners of capitol is likely far from dollar for dollar since higher corporate taxes to some extent can be passed to consumers through higher prices and employees through lower wages. There is some argument as to the size of each in the mix, but no argument as to these elements.

It would seem fairly straightforward that we want business to maximize its efficiency, to maximize profits, so that shareholders (who will be all of us as SS and health care are reformed) maximize their capital gains and build up enough wealth to fund their own social safety nets.

An ideal tax code then would be one that encourages business efficiency and profitability and individual savings.  Tax consumption.

Posted by at May 24, 2013 6:44 AM
  

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