Eliminate the Corporate Income Tax!

by Dave Schuler on May 4, 2014

Erstwhile Obama Administration “auto czar” Steve Rattner takes to the opinion page of the New York Times to argue that it’s time to end the corporate income tax. Reacting to the same news I commented on earlier he writes:

A more ambitious, and therefore more politically difficult idea, would be to scrap our unworkable corporate tax system altogether and instead tax shareholders, first by eliminating low tax rates on capital gains and dividends.

That would offset only a small portion of the loss of corporate tax revenue (a projected $350 billion in 2015), so we should raise the balance by eliminating loopholes enjoyed by wealthy Americans, increasing rates on their earned income and potentially introducing new concepts, such as taxing gains on investments as stock prices rise rather than when they are sold.

The wealthy need not fear; eliminating corporate taxes would lead to a jump in business earnings and, consequently, stock prices. That would encourage similar actions by other countries. Otherwise, their companies might move here to enjoy a zero corporate tax rate.

Higher stock prices would also help pension funds, foundations and other tax-exempt institutions focused on social betterment.

While eliminating corporate taxation would be branded a giveaway, properly engineered reforms would provide a huge uplift to ordinary Americans.

It’s heartening to see a Democratic Party apparatchik like Mr. Rattner getting behind eliminating the corporate income tax. As best as I can tell, it presently serves mostly to give large corporations that can afford armies of tax attorneys and accounts and are able to engineer exemptions for themselves a competitive advantage over small and medium companies that don’t have the resources to do the same thing.

Just as a reminder, the U. S. has the highest marginal effective tax rate on corporate investment of any OECD country.

{ 14 comments… read them below or add one }

michael reynolds May 4, 2014 at 10:50 am

presently serves mostly to give large corporations that can afford armies of tax attorneys and accounts and are able to engineer exemptions for themselves a competitive advantage over small and medium companies that don’t have the resources to do the same thing.

That’s the way to play it politically. Cast it not as corporate vs. individual, but as big vs. small. Screwing the entrepreneur in favor of the mega corporation.

... May 4, 2014 at 11:38 am

potentially introducing new concepts, such as taxing gains on investments as stock prices rise rather than when they are sold.

That sounds like a push for quadrupling the size of the IRS.

jan May 4, 2014 at 12:45 pm

I personally think the corporate income tax should be lowered, rather than eliminated entirely, making the U.S. more competitive with other countries. In Rattner’s piece, however, he tasks raising taxes on Capital gains and dividends as a monetary sacrificial lamb, which he thinks will then serve to fill in any fiscal gap the corporate tax elimination might manifest. However, according to Forbes, higher revenues are best achieved via more economic growth, which increasing capital gains and dividend taxes does not generate.

There is a wealth of evidence suggesting that higher returns to saving — which a lower capital-gains tax rate engenders — ultimately result in more saving and investment.

Some of the more immediate evidence is:

Ultimately economic growth is the key ingredient to generating the revenue necessary to cure our budget ills. The two periods when revenue grew the fastest in recent history were 1997-2000 and 2004-2007. In neither occasion did tax rates increase at all — but both represent periods of strong, sustained economic growth.

Dave Schuler May 4, 2014 at 1:19 pm

There are any number of reasons for favoring one strategy over another in tax policy. Tax policy can be looked as a means for raising revenue. It can be looked at as a way of changing behavior. It can be looked at as a signal for one ideological position or another. It can be a way of rewarding friends and punishing enemies. It can be a fund-raising strategy.

I don’t think there’s any requirement that individual Congressmen have some simple motive behind their views. In general, I think their motives for supporting one tax policy over another are complicated and, frequently, not particularly well thought out.

michael reynolds May 4, 2014 at 1:34 pm

The two periods when revenue grew the fastest in recent history were 1997-2000 and 2004-2007.

So, the dot-com bubble and the real estate bubble. Yeah, let’s do more of that.

Dave Schuler May 4, 2014 at 1:36 pm

Of course, the bubbles only increased revenue as a byproduct of the increase in income that they produced. Non-bubble income increases would increase revenues, too.

michael reynolds May 4, 2014 at 2:48 pm

Dave:

Yes, but we seem not to actually know how to do that. I realize everyone has ideas, but the closest parallel to this recession is the great depression which we escaped from only by putting the economy on a war footing. (It’s also how Germany escaped its own economic problems at the time.)

I think imagining that cutting corporate tax rates would somehow create growth is magical thinking. Italy and Japan both cut their corporate tax rates within the last decade, neither was suddenly transformed. Ditto the UK.

Spain and Germany have basically identical rates, with very different economies. If you scan down the list of corporate tax rates http://www.kpmg.com/global/en/services/tax/tax-tools-and-resources/pages/corporate-tax-rates-table.aspx you just don’t see obvious correlations. In fact, lowering corporate tax rates seems to have been tried and not succeeded in a number of places.

The KPMG table has the US at the highest rate but compared to a lot of countries we’ve done a better job of weathering the downturn. France has a slightly lower corporate tax rate. Whose hand do you want to play, ours or theirs? Ireland has a very low corporate tax rate and was touted by conservatives as the Celtic Tiger, ready to be a real player, showing the world the wonders of kowtowing to corporations. Current unemployment rate in Ireland is 12.6%.

Let’s say I make widgets. Let’s say I get hit with the full 35%, head on. That cuts my profits – profits I could use to invest in new widget plants. You cut my taxes in half, all the way down to 20%. But there’s no market for more widgets. So I “invest” the extra profits in paying off shareholders, and by shareholders I mean the Chairman, the CEO, etc… And that accomplishes what, exactly, in terms of growth?

If there existed a market for more widgets, I’d be investing in new plants regardless of corporate tax rates. Wouldn’t I? At very least I’d want some proof that there’s a shortage of investment capital out there before I assumed that increasing corporate profits via tax cuts was necessary. Are corporations unable to raise money? Are they unable to borrow? Is more money in corporate coffers the magic answer?

I don’t get it. I think if you want more widget factories you need more people who want to buy widgets. Otherwise you’re not going to make more widgets no matter what the tax code says.

Dave Schuler May 4, 2014 at 3:06 pm

I realize everyone has ideas, but the closest parallel to this recession is the great depression

It may be the closest but it’s not particularly close. GDP has not fallen remotely as much as it did then. Unemployment has not increased remotely as much.

So I “invest” the extra profits in paying off shareholders, and by shareholders I mean the Chairman, the CEO, etc… And that accomplishes what, exactly, in terms of growth?

That’s precisely why I think that tax reform plans, etc. should be much more narrowly tailored than the broad strokes plans being offered.

Something that’s frequently forgotten is that even during the Great Depression of the 1930s some sectors held their own and others grew enormously. It was during the 1930s that mass distribution powered by advertising really took hold. The rate of new business formation during the Great Depression was higher than ours is now. Any number of explanations could be offered for that but mine is that businesses are like saplings. When the forest giants overshadow everything, there’s not enough sunlight for them to grow.

michael reynolds May 4, 2014 at 3:42 pm

When the forest giants overshadow everything, there’s not enough sunlight for them to grow.

I actually saw that play out before my very eyes. I was at a Mac World thing with Jake a few years ago. There were several little start-ups touting facial recognition software for photos. That, first. Then, the Apple keynote in which Apple casually crushed every one of those start-ups by announcing their own facial recognition for iPhoto.

What’s the point in innovating if Apple or Google or Samsung comes along and squashes you like a bug?

We’re seeing a different version of this with Tesla. Car dealership groups are using state governments to basically block Tesla from the market. Not federal government, by the way, but states, those wondrous laboratories of innovation.

Guarneri May 4, 2014 at 5:24 pm

“Let’s say I make widgets. Let’s say I get hit with the full 35%, head on. That cuts my profits – profits I could use to invest in new widget plants. You cut my taxes in half, all the way down to 20%. But there’s no market for more widgets. So I “invest” the extra profits in paying off shareholders, and by shareholders I mean the Chairman, the CEO, etc… And that accomplishes what, exactly, in terms of growth?

If there existed a market for more widgets, I’d be investing in new plants regardless of corporate tax rates. Wouldn’t I? At very least I’d want some proof that there’s a shortage of investment capital out there before I assumed that increasing corporate profits via tax cuts was necessary. Are corporations unable to raise money? Are they unable to borrow? Is more money in corporate coffers the magic answer?

I don’t get it. I think if you want more widget factories you need more people who want to buy widgets. Otherwise you’re not going to make more widgets no matter what the tax code says.”

Wow. One does not know whether to laugh or cry. There is only one snippet here worth the effort to comment on: “I don’t get it.”

Truer words have never been spoken.

Michael Reynolds May 4, 2014 at 5:34 pm

And yet as always you are unable to articulate your point. Imagine my surprise.

Dave Schuler May 4, 2014 at 5:38 pm

I can only suggest that the soul of entrepeneurship is believing that you can do something better. Entrepeneurs don’t look at a slack market and say “Nobody is selling anything so I can’t, either”. They say “Why isn’t anybody else selling? I can!”

steve May 4, 2014 at 8:29 pm

“The two periods when revenue grew the fastest in recent history were 1997-2000 and 2004-2007.”

We didnt raise capital gains rates or the dividend tax in 2008. What happened? If you think it was responsible for that growth, why did it stop working? Same for 2001 BTW.

Drew- Good to know. That explains the zero growth rates we had prior to 2000.

At any rate, I also support abolishing the corporate tax. Our effective tax rate is very low. Corporate income tax no longer provides that much revenue. The costs of the corruption and influence in trying to avoid those taxes is way too high. Besides, who wouldnt want to put tax lawyers out of work?

Steve

Dave Schuler May 4, 2014 at 8:56 pm

Our effective tax rate is very low.

Not according to the info at the link I provided which says that we have both the highest nominal and effective rates of any OECD country.

If you have information that contradicts that, I’d very much appreciate it.

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