Taxes

Reforming Corporate Taxation Is a Bipartisan Issue

The U.S.'s insanely high corporate tax rate is bad policy.

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Obama
Screenshot via CBSN

What do Sen. Chuck Schumer, D-N.Y., President Barack Obama and all the Republican presidential candidates have in common? They all want to fundamentally reform the corporate income tax. President Obama proposed cutting the corporate tax rate from 35 percent to 28 percent. Sen. Schumer wants a major reduction to taxation of corporate income abroad. Sen. Ted Cruz, R-Texas, says he would abolish the tax altogether as president—replacing it with a 16 percent business flat tax—and Donald Trump would reduce the corporate tax rate to 15 percent.

Unfortunately, nothing is happening. That's not for lack of a good reason to make this reform a priority. For several years now, the United States has had the highest corporate income tax rate in the developed world, with a national statutory corporate tax of 35 percent. The United States also has the highest combined rate (39.2 percent) when the federal rate and the average rate among the states are added. Japan used to have the highest combined rate (39.8 percent), until it got it down to 36.8 percent in April 2012.

Even such high-tax nations as France have lower rates. However, the real competition comes from Canada (26.1 percent), Denmark (25 percent), the United Kingdom (20 percent) and the many countries, such as Ireland (12.5 percent), with rates below 20 percent. Moreover, competition is intensifying. Last June, the U.K. announced that it would cut its rate from 20 percent to 18 percent in the next five years. It's now saying that it will lower the rate even further, to 17 percent. These reductions are the final stage of drastic cuts implemented since 2007, when the country's companies faced a 30 percent tax rate. That's a second wave of reduction since the rate was as high as 54 percent in the 1980s.

Now contrast this with the United States. In the 1980s, policymakers responded to the pressure put on by many countries lowering their corporate rates by decreasing America's rate from 49.7 percent to 33 percent. However, since then, the U.S. has fallen asleep on the switch (and even raised the rate by 1 percentage point in the 1990s) and is now widely out of sync with internal competition. In 2015, the average corporate rate for countries in the Organisation for Economic Co-operation and Development was 25 percent, down from 48 percent in the early 1980s.

As if that were not enough competition for American companies, the U.S. government burdens them with another layer by taxing them on a worldwide basis. In that system, income from American companies is subject to U.S. taxes whether it's earned in Seattle, Paris or Singapore. By contrast, most wealthy countries don't tax foreign business income; about half of OECD nations have "territorial" systems that tax firms only on domestic income. In other words, U.S. exporters face a much less competitive tax system than most of their biggest competitors.

American lawmakers, who are always eager to extend subsidies to exporters in the name of helping U.S. competitiveness, should think about the absurdity of the current system. In its competition with Boeing, French manufacturer Airbus faces lower rates than Boeing and is taxed on a territorial basis (at the rate in place in the country where the income is earned). Good for Airbus if it earns income in a country that has a lower corporate tax rate than France. More importantly, Airbus faces a lower rate than Boeing no matter where Boeing sells its planes if the U.S. firm decides to bring its foreign income back home.

That's right; years ago, lawmakers answered the call for reform by instead designing a loophole that helps companies avoid the heat of the U.S. rate by keeping their foreign income abroad, which is what many companies do. But sometimes that's not enough, and they simply renounce being American companies by incorporating abroad.

Not everyone would like to reduce taxes on corporations, but everyone should. The data show that most of the corporate tax burden is actually shifted to workers, who end up shouldering the tax in the form of lower wages. With the U.K. taking further measures to reduce its burden on corporations, boosting its workers' wages and inflicting yet another blow to U.S. competitiveness, Congress should do what's right by reforming the corporate tax. It may be the one bipartisan issue out there. All we need is leadership.

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  1. The United States of America loves pricing itself out of markets. Whether it’s the labor market or this, we can’t help ourselves.

  2. Is it just me, or is Barry O. starting to resemble Jeff Goldblum?

    1. I see it. He needs more hair and stutter, though.

  3. Too many people have an irrational hatred of corporations to understand why cutting taxes on them would be a good thing. These people will keep meaningful reform from happening, especially in a year where Bernie Sanders is doing well on the national (or at least northern regional) stage.

    1. It’s because after WWII and the Cold War, Hollywood and TV needed new villains in their movies. They turned to corporations. Every bad guy in every movie is a corporation, usually trying to commit some form of genocide or intentionally poisoning people, which is absurd since every actual genocide has been carried out by governments.

  4. And they still don’t pay their “fair share” apparently.

  5. [Sld]
    My idea, end corporate income tax but make c corps pass thru entities. I know that is hard, but should be doable. And if it is too complex, secondary idea is to require x% of retained earnings from fiscal year a above threshhold y must be paid as dividends in fiscal year b.

    1. Making large public C-corps pass through entities would be logistically impossible. Requiring x% of retained earnings to be paid through as dividends would be a killer to growing corps.

      1. You missed the “threshhold y” part.

        Y would be large for that reason.

        1. But even threshhold Y would be an issue. Say a pharma co (OMG BIG PHARMA) with many products in development (there are a ton of public pharma co’s that have drugs in development but none being sold) that gets its first approval. That $’s going to go to more development costs for their other drugs. And that’s just an example off the top of my head. Many other companies in other industries with similar issues.

          1. Issue dividends and then sell bonds/stock to create more cash. And since that cash isnt earnings, it doesnt count against threshhold.

            It isnt ideal obviously, hence the sld, but considering their tax rate is going to zero, paying some interest on bonds is still a net benefit.

        2. You can’t design rules like that; they have unpredictable consequences, and good accountants figure out in next to no time how to take advantage of them.

      2. How is paying 35% of earnings out as dividends any more of a killer than paying 35% out as taxes?

        And since we are talking retained earnings, make it like 15%, and that is way less than 35% for a growing company.

        1. How is paying 35% of earnings out as dividends any more of a killer than paying 35% out as taxes?

          You’re missing the point, I think. An idea can be not-as-terrible as a 35% tax and yet still be terrible.

    2. Can we have an investment loophole?

    3. I’ve always thought the same thing. Though it would be a mess to rewrite the tax code to remove corporate tax but still avoid rampant loopholes and shelters. And of course the underlying reason for that is the fact that taxing of income is a bullshit concept itself.

  6. Not gonna happen.

    Too convenient a boogeyman for the Occupy Wall Street lemmings. They’ll happily tell you the REAL corporate tax after all the loopholes and handouts is less than a secretary’s (or something like that).

    Personally, I think it’s retarded to tax a group of people on their group income and then re-tax every individual in that group on their personal income after the group income is paid out. But if my opinion ever catches on in the US, I’ll eat my hat.

    1. They tell me that, then I read corporate annual reports and know they are lying or ignorant or both.

    2. Agreed completely. I’ve never been able to figure out the concept behind taxing corporations if you have individual income taxes.

      1. Corporations are only taxed on “profit”, which exclude individual taxes. Those profits are mostly paid to shareholders, who then pay taxes on it.

        In sane countries, like Canada, the corporate tax plus the capital gains tax is the same as the individual highest tax bracket. This makes sense. All money is taxed the same. The US system is ridiculous.

    3. “…Personally, I think it’s retarded to tax a group of people on their group income and then re-tax every individual in that group on their personal income after the group income is paid out….”

      It also merely makes the corp a tax-collector to remove a certain amount from its customers with every purchase.
      Companies do not pay taxes; people pay taxes.

      1. Thank you. I told a friend, an otherwise intelligent man, and not a progressive, this. I explained why. He looked at me with a perfectly straight face and said, ” Well, corporations could pay a little. “

  7. President Obama proposed cutting the corporate tax rate from 35 percent to 28 percent.

    15%. That’s about the income tax rate payed by ‘S’ corporations. Does anyone else know, including Obama and congress, the distinction between an ‘S’ and ‘C’ corporation?

    1. I’m certainly a barely-informed amateur but let me try:

      S corps are an old way to do pass-through taxation that is largely unused and replaced by LLC’s nowadays.

      S corps are very limited in number of shareholders and single form of stock, making them an option only for small businesses anyway.

      Where’d you get that number?

    2. Other than a “business fee” or some other flat tax at the state level, S-corps don’t pay taxes – particularly at the Fed level. All the income flows out, so a mildly successful S-corp, say $1.5 M of net income on $13 M of sales, with four shareholders, will pay about 33% individual income tax to the Feds, about 7% to the State (in which I live anyway) and “passive” shareholders are socked with an additional 3% Obamacare tax. So that’s 40%-43% taxes on the corporate income pass through.

      This assumes about $150,000 of regular income for a married taxpayer, who is getting a W-2 from the corp (non-passive) with a spouse bring in some income, so tax is paid a lower level for income tax at those monies, but they will also be paying their SS taxes at that point. In short, if you’re running a small S-corp, you get to pay in a LOT of money, and that’s not even including property taxes, sales taxes, excise taxes (gas), and many fees. All in, including both sides of the FICA, owners of a reasonably successful, though humble-sized S-Corp, are paying well over 50% of their income in taxes of one form or another. We’re not talking “corporations” where the top brass are making $5 M base and $35 M in stock options, we’re talking people pulling down, maybe, $150,000 in W-2 income and $375,000 in S-corp K-1 income, with a spouse making $50,000 at something.

      1. cont

        And the money to cash flow those taxes comes out of the business, taking away capital to expand, create jobs, etc.

        These people are part of the “1%’s” people are going on about, but I can tell you, $575,000 a year, paying 50+% out in taxes, for all the work that is necessary to run a small business, is barely worth it at this point. That’s why so many are cashing out and selling to large corporations or to capital groups (consortia of doctors parking their excess money). The owners of the company I work for aren’t driving huge cars, and going around in limousines, and optioning Leer Jets. They’re making day to day decisions of what they can leave in and what they need to take out. They make decisions to pay their own taxes to leave capital in the company so they can reinvest in machinery. And yet the parasites call the 50% “a good start” and they are clamoring for even more. What these people are going to subject to once the Boomer Retirement hits, I don’t know. That’s going to hit EVERYONE with assets hard, but small businesses are going to get raped even further.

  8. This sounds like the easiest reform ever. Drop the rate into the teens, get rid of the ridiculous world-wide tax collection (on corporations and individuals), don’t let the bill get too bogged down with other crap – and pass it.

    I don’t get why Ryan and McConnell aren’t pushing it. If Obama did decide to veto, just pass it again next year and get it signed (unless Bernie wins).

    1. get rid of the ridiculous world-wide tax collection …[on] individuals)

      Fuck that, the serfs are politically insignificant!

  9. Do corporation actually pay taxes or do they collect taxes? Corp tax should be zero or close to zero. Then with a fairtax style embedded tax we pay on consumption, not income and investment.

    1. Fuck consumption tax.

  10. Just to be complete, my answer without standard libertarian disclaimers:

    Single land tax.

    No income tax, corporate or individual.
    No sales tax.
    No property tax.
    Single tax on land value, no exceptions,- split it 3 ways, to federal, state, and local. Fun part of no exceptions is the big ass tax the feds have to pay to Wyoming.

    1. So nobody owns their land. They simply rent it from the government. Don’t pay your rent and the government takes everything away.

      I don’t like that at all.

      At least with a consumption tax you can choose not to pay it by spending your money on investments or something that isn’t consumption, and you don’t risk being kicked off your land for being unable to afford to pay rent to the government.

      1. I like the consumption tax idea better too (or at least dislike it less). But then what are we presuming the govt “owns” in a consumption tax system? Seems the answer would be pretty much everything up to and including everyone’s labor and therefore their body (they ultimately will take it away when you don’t pay up, after all…). Or would you allow, for example, a dentist and carpenter to trade services and dodge the tax? And if so, why tax skilled laborers just for doing the exact same exchange via currency?

        1. But then what are we presuming the govt “owns” in a consumption tax system?

          A monopoly on enforcing rules against force and fraud. If someone defrauds you then you have paid the government a fee for the service of responding to fraud. If there is no fraud then you’re paying forward.
          Or something. I dunno.
          I just despise the concept of taxing land and property because if you can’t pay the tax, your property isn’t yours anymore. That means it never was yours.

          1. Why can’t you apply the same logic to a land tax as a fee for similar protection of your land? Obviously they do have to do it regardless whether you participate in trade. And of course this is the logic used by left wing liberals who want to claim they are true neoliberals and not the socialists they actually are.

            1. Like I said, I don’t like land taxes because that means the government owns the land, not you. With a consumption tax you pay at point of sale. If you can’t afford the tax, you can’t buy whatever it is you wanted to buy. Nothing is taken away from you if you can’t afford the tax. With property and land taxes, if you can’t afford the tax then something will be stolen from you.

              1. Presuming you don’t tax consumption to fulfill basic needs for survival.

                And I understand your point about land tax, my point is that any compulsory tax on commerce is just a different form of a govt claim of ownership on your property (including your body). The fact that it can also be viewed as a monopoly on some service is just a different perspective. You can view any property ownership as a form of monopoly.

                1. Presuming you don’t tax consumption to fulfill basic needs for survival.

                  Who defines basic needs? I’d rather pick some number out of the air and give people the ability to get a rebate on that amount of consumption every month or year or something. Then they decide what their basic needs are.

                  1. “Who defines basic needs?” This is just a logistic issue. I simply pointed out this caveat since you said “If you can’t afford the tax, you can’t buy whatever it is you wanted to buy. Nothing is taken away from you if you can’t afford the tax.” If you can’t afford the tax on purchases to fulfill your basic needs, your life is what gets taken away from you, of course.

                2. Basically I’m describing the Fair Tax (how much more oxymoronic can a name get?).

                  1. Single land tax has no deadweight loss, unlike consumption tax.

                    1. You make some good points, robc, but I still can’t get past the basic premise of a land tax which is “Your land is not yours. Pay rent to the government or men with guns will take your property from you. Defend yourself and you will be killed.”

                    2. As long as the state exists, that will exist.

                      The state claiming ownership is bullshit. The exact same bullshit as you claiming ownership.

                      The thing is, the rents you are paying the government are, in theory, the rents generated by mere possession and hence you lose nothing.

                    3. Refering back to the s corp discussion above, its a passive ownership tax. The value generated from mere possession goes to the state. But 100% of the fruits of yoyr labor stay with you.

                      Farm the land and keep all your profits. Build a house and pay no tax for the house value. Build an office building and rent it out and pay no tax on building or rent collected from tenants.

                      Its anti-land speculation, which while isnt a positive, isnt a negative either.

      2. Come up with a natural law justification for land ownership and I would agree with you. Land “ownership” is pragmatic and utilitarian, two things I normally dont like. But I agree with Mises and George on land ( who came at it from different perspectives). If we arent gonna be anarchists, this is the way to go.

        Government protects our land ownership and this is the fee we pay.

        Plus I hate rent seeking, so I need to be consistent. The Georgist concept of the single land tax is to extract the rents while not taxing any of the value added.

        1. Property is property. What makes land any different?

          1. What is the source of your ownership?

            The jews can at least claim a divine right to Israel, the rest of us are SOL.

            With other property I either created it or paid someone to create it.

            If you make an island, I wouldnt tax it either.

            Mises said you just need to draw a line and claim before that time any claims on land is invalid. Land was acquired by theft, but at some point you have to draw a line and stop that.

            George thought everyone owned all land, but that ownership was necessary to deal with it. So extracting the rents allowed for the advantages of ownership without the rent seeking. But, he thought taxing what we produce was evil. Hence the SLT.

            I agree with both of them, sorta.

        2. Come up with a natural law justification for land ownership…

          The Ethics of Liberty

          Crusoe finds virgin, unused land on the island; land, in short, unused and uncontrolled by anyone, and hence unowned. By finding land resources, by learning how to use them, and, in particular, by actually transforming them into a more useful shape, Crusoe has, in the memorable phrase of John Locke, “mixed his labor with the soil.” In doing so, in stamping the imprint of his personality and his energy on the land, he has naturally converted the land and its fruits into his property…

          It is the “homesteading” principle.

          1. Which applies to a few islands.

            Ask the indians about it wrt north america

            If you leave your field fallow, can I plant crops and claim it since I mixed labor with it?

            I like Locke but this bit of his is bullshit.

            1. If you leave your field fallow, can I plant crops and claim it since I mixed labor with it?

              Technically, I would argue, under the natural law or homesteading principle…

              1.) fallow: a piece of… uncultivated land – If I never did anything with the land, then I have not yet “claimed” it and it is, therefore, “unowned”. So, absolutely! Stake your claim.

              2a.) fallow: (of farmland) plowed and harrowed but left unsown for a period – Absolutely not. Just because I have not planted anything, I have still mixed my labor with the soil by “plowing and harrowing” the land.

              2b.) However, I would argue, that there is a point where, if the land is neglected to the extent that any capital improvements I made have disappeared or so deteriorated, then the land has been abandoned and reverts to “unowned”.

              I would further argue that no one can legitimately own more land than they can actually use or employ someone else to put it to use.

      3. So nobody owns their land. They simply rent it from the government. Don’t pay your rent and the government takes everything away.

        As a practical matter isn’t that true? Any land you own in the United States is stuck in the United States, and if the US government wants that land they can take it whenever they please. Other forms of property are less easily taken away. I’d rather they tax the land than tax income.

        1. As a practical matter isn’t that true?

          Under the current system — pay yer damned property taxes or be removed from the property — yes, it is true that we technically rent the land we “own” from the government. That doesn’t negate the principle any more than institutional slavery negated the natural law right of self-ownership.

          Any land you own in the United States is stuck in the United States…

          That is, frankly, the only real distinction between land property and other property; land cannot be relocated or squirreled away in a survival cache somewhere.

          … and if the US government wants that land they can take it whenever they please.

          The ability to take something does not negate or refute the owner’s right to it.

          Other forms of property are less easily taken away.

          I dunno, I think the myriad of asset forfeiture abuses compared to property “reclaimation” (for unpaid property taxes) would suggest otherwise.

          I’d rather they tax the land than tax income.

          I’d rather they impose no taxes at all and fund government through a voluntary federal lottery.

  11. Yeah yeah yeah, what about the insanely high spending?

    1. Well, arguably, lowering taxes raises more revenue. They should also probably spend negative numbers for a few decades given our current spending trajectory.

  12. When ever this is brought up, you always hear the statists complain about all the loopholes and subsidies that exist that supposedly lower the amount of money corporations actually pay. Most businesses now are corps, and most businesses aren’t giant international conglomerates, so they probably don’t have the resources to actually attempt to advantages of the loopholes and subsidies. So while I doubt it’s actually true for smaller corps, do the bigger ones really get away with murder here?

  13. Meanwhile, progressive favorites Liz Warren and Bernie Sanders think corporations don’t pay their fair share. I seem to recall reading that GE has gotten away with paying zero income tax in recent years. Warren and her supporters often argue that when the actual corporate income tax returns (and bills paid) are examined, that the “effective” corporate tax rate in the USA isn’t high at all – it’s very much in line with many other developed nations.

    Why progressives fail to understand that corporate taxes are a cost that must show up in some combination of higher prices, lower wages, lower profits, and/or lower dividends continues to amaze me. They ignore the negative outcomes.

  14. I suggest we eliminate taxes.

    I win.

  15. RE: Reforming Corporate Taxation Is a Bipartisan Issue
    The U.S.’s insanely high corporate tax rate is bad policy.

    But the ruling elitist filth will never lower the corporate tax in America.
    They’re making way too much money for themselves and their cronies.
    Besides, lowering the corporate tax in America would only bring back jobs from overseas, have more Americans working and improve the US economy.
    What socialist slaver in their right mind would want that?

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