Why not just scrap all corporate taxes?

Both major-party presidential candidates claim to have tax plans that will help make the economy work for everyone. They will assist the anxious middle class, the downsized and the dispossessed while growing the economy and jobs. An important component of each is the treatment of corporate profits.

The candidates differ on how to reform the corporate tax code. Front-runner Hillary Clinton has not embraced President Barrack Obama’s proposal to reduce the federal corporate marginal tax rate to 28 percent from 35 percent, the highest in the developed world, and pair the reduction with a broader tax base (fewer exemptions) to generate savings to finance the proposed cut. Instead, Clinton has proposed tighter rules to deter corporations from moving abroad and measures to prevent corporate tax avoidance.

Donald Trump, on the other hand, favors a 15 percent corporate income tax rate and would offer corporations a reduced 10 percent rate if they bring home some of the $2 trillion American corporations have stashed overseas.

But the best path might just be to scrap the corporate tax altogether.

Neither candidate has addressed the issue of most high-income countries having adopted a territorial tax system, in which income earned abroad is not taxed by the home country. Yet the U.S. continues to use a version of a global tax system that taxes domestic companies’  income regardless of where it was earned.

The case for lowering the tax rate is that the gap between the U.S. rate and that of other countries encourages companies to shift investment and profits overseas. Corporations complain that high corporate taxes and a global tax system make it more difficult for them to compete in the world economy, attract foreign investment to the U.S. and create American jobs.

The American public is greatly unimpressed by these arguments. Polls show that the majority of Americans believe corporations pay less than their fair share in taxes. According to a survey by Citizens for Tax Justice, many Fortune 500 companies paid an average effective federal tax rate of just  19.4 percent, much less than the 35 percent marginal rate, the additional tax paid on an extra dollar of income.

A key target of public criticism is the expansion of deductions and exemptions to corporate income that have contributed to its decline as a share of total tax revenue over the last several decades. Corporate income taxes accounted for 32 percent of federal tax income in 1951; by 2015 it was 11 percent.

The U.S. has a dysfunctional and confusing tax code. Lost between fact and fiction is the question who bears the economic burden of taxing  corporate profits. You don’t have to be drunk, crazy or both to understand that this is a nontrivial question.

Are corporate taxes simply another way to tax firms’ shareholders, employees, and customers? When corporate income is paid out as dividends or realized as capital gains, corporations and shareholders pay tax twice on the same income. Are these the only people who actually end up paying the corporate income tax, or do employees also pay in the form of lower wages and fewer benefits?

If that is indeed the case, then perhaps it is time to scrap the corporate income tax altogether and instead tax individuals on their dividends and capital gains at ordinary income tax rates. The corporate income tax would go the way of Prohibition, and in the process make the U.S. a desirable place to locate and build businesses.

This certainly isn’t the last word on the subject, but it isn’t a bad approach to reforming the corporate tax code, which will likely be addressed after the 2016 elections if one party controls the White House and Congress . If not, we’ll just continue to improvise- and likely produce the same dysfunctional results.

Originally Published: Aug 23, 2016

Corporate America must pay fair tax rate

Both President Obama and Republicans have called for lowering the corporate tax rate, citing America’s global competitiveness. But cuts should be reserved for companies that invest in the U.S. and its workers. Other corporations should pay more, and all should pay their fair share.

The federal government first taxed corporate income in 1909. Corporate rates were initially below 10 percent, but following World War II they increased dramatically, to over 50 percent in I951. Between 1951 and 1986, the top corporate tax rate ranged from 46 to 52.8 percent.

Large corporations were also complaining about the tax rate in 1986, the year of the last significant federal tax reform. The rate was reduced to 35 percent, loopholes were closed and the tax code simplified. At the time, the rate was lower than that of most developed countries. But today the 35 percent rate is one of the world’s highest, and it jumps to 39.2 percent when state and local taxes are included.

This rate is double the European average and more than triple Ireland’s 12.5 percent rate. Over the past 25 years, almost every country in the Organization for Economic Cooperation and Development has cut its top corporate tax rate. Corporate America is again arguing that the U.S. rate is a disadvantage for domestic  corporations.

But while U.S. companies often complain about the 35 percent top rate, they don’t like to admit that hardly any of them pay anything close to it. While the United States’ corporate tax rate is relatively high, it’s not a meaningful measure of the actual corporate tax burden.

A 2013 Government Accountability  Office report showed that large, profitable U.S. corporations paid an effective federal tax rate of 12.6 percent of their worldwide income in 2010, about one-third the statutory rate. Adding in foreign, state, and local taxes increased the average effective tax rate to 16.9 percent, which is certainly competitive with other developed countries and is a lower rate than the average teacher or police officer pays. A 2012 study by Citizens for Tax Justice found that over a recent period, 30 of the largest U.S. multinationals with more than $160 billion in profits paid no federal income tax at all.

According to the Congressional Research Service, corporate income taxes have diminished as a source of federal revenue, from 39.8 percent in 1943 to 9.9 percent in 2012, as corporate profits reached record highs. The GAO reported that in 20I2, corporate income taxes generated about $242 billion in federal revenue, while individual income taxes accounted for $1.I trillion.

U.S. corporate tax collection equaled just 2 percent of gross national product in 2011, according to the OECD. That was the lowest in a ranking of 27 wealthy countries.

The reason they pay less in taxes is not because corporations play a less important role in our economy or that corporate profitability has diminished. Rather, it is that corporations have learned how to exploit loopholes in the tax code and retain lobbyists who move well in Washington. And let’s not forget the $2 trillion in profits stashed abroad.

Much of the simplification from the comprehensive 1986 tax overhaul has been lost. Between 2001 and 2010 there were over 4,000 changes festooned to the tax code, resulting in a code of nearly four million words with a sky-high impenetrability quotient.

Nearly six years after the financial meltdown, the economy is still far from recovery. Over 20 million Americans who want a full-time job can’t get one and labor force participation is at its lowest level since 1978. Low wages and stagnant incomes prevail.

Congress should create incentives for companies that invest and create jobs in the U.S. and impose higher taxes on firms that do not. But any tax reform should start from the premise that corporate America has to pay its fair share, and that means no profitable corporation having a lower tax rate than your child’s teacher.

originally published: August 30, 2014