At Forbes Nathan Lewis has a good post about the conundrum facing the United States. We have the highest corporate income tax rates among OECD countries but realize less revenue from corporate income taxes than other OECD countries do:
One of the harder economic concepts to embrace is that tax revenues, as a percentage of GDP, are often lower when rates are higher, and higher when rates are lower. Huh? The reason is that high rates have a multitude of effects, among them: people do not engage in highly-taxed activities; and there is inevitably intense pressure upon the political system to create all sorts of exemptions and exclusions, so that more activity is taxed at a lower rate, or untaxed.
That is why the U.S., with a 38.91% combined tax rate (according to the OECD), has total corporate tax revenue of a meager 2.06% of GDP, while Britain, with a 19.00% combined rate, has revenue of 2.58% of GDP (average over five years 2011-2015).
That’s not a “trickle-down” or “Laffer Curve” argument. It is a statement of fact based on observable behavior.
What are the objectives of corporate income taxes? If they are to ensure that corporations “pay their fair share”, they’re obviously not accomplishing that. If they’re to realize more revenue, they’re not accomplishing that, either.
Are they intended to provide big companies a competitive advantage over small companies? If so, that objective is neither legitimate nor desireable. New companies start small and they hire. Big companies have trimmed payrolls for decades.
Are they intended to show voters that politicians’ hearts are in the right place, that they’re on the side of the little guy? That’s not a legitimate reason, either, and it’s reducing the effectiveness of legitimate objectives of corporate income taxes.
How does 3.5% of a higher GDP realized from the corporate income tax sound?
Probably, the best thing would be to implement a full “flat tax†reform – the corporate half of the “flat tax†proposals that have already been worked out in detail. Personally, I like Steve Forbes’ version, described in The Flat Tax Revolution (2005). This would eliminate huge counterproductive swathes of the tax code, and probably produce much more revenue – perhaps as much as 3.5% of GDP, as demonstrated by Hong Kong, with its 16.5% rate.
Establish priorities. Do what is required to accomplish the priorities. Stop letting politicians campaign at the nation’s expense.
Isn’t there an incentive built into the corporate tax to spend the money? If, for example, the corporate tax rate went to zero percent, wouldn’t that result in larger cash balances, as opposed to perhaps giving a year end bonus to employees?
(One can argue that this is not good corporate governance, the cash should be invested in improving the business or distributed as dividends, but I don’t think that’s what has been happening of late)
Taxes are only a fraction of the expense, which is anabsolute cash outflow. It’s like the canard about losing money for tax write offs.
Stock buybacks, which I assume you are referring to, is just another form of return of capital. It can, though, change the risk profile of the cap structure more than dividends. But not necessarily.
Memory says Once Upon A Time, back in the 1950s maybe, the share of taxes paid by corporations was higher than today, and ordinary people would say to themselves and others, “I don’t like paying taxes, but if Ford Motor Company is paying thirty five percent, I can pay my thirty.”
I dunno about Ford, but last I looked Apple Was paying zilch, and it’s been a while since I heard someone he was content to pay taxes because corporations paid at even higher rates. Granted, a lot of lower income individuals aren’t paying taxes either.
Anyhow. I don’t think there’s a magic number — ten percent, fifteen, ninety five, anything — that will be accepted by the general public as a “fair” level of corporate taxation. As I noted, many lower income citizens escape taxes themselves and pay little attention to such issues, so a fair corporate tax is basically a concern for the wealthy or at least above-average income folks.
I would still eliminate the corporate income tax entirely, tax capital gains as regular income and get rid of the various loopholes used by speculators. But that has a snowball’s chance in hell of happening.