We're Number One!

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A report from the Tax Foundation gives us the happy news that as of next month, America will be number one in a new field: corporate income taxes.

The combined federal and (average) state US corporate tax is 39.2%. Among the Organization for Economic Cooperation and Development (OECD) countries — the 34 most prosperous countries, which include all of our major economic competitors — this is exceeded only by Japan, at 39.5%.

During the last decade, nine of the OECD countries cut their corporate tax rates by 10% or more. The biggest tax-cutters were Canada, Germany, Greece, Iceland, Ireland, Poland, the Slovak Republic, and Turkey. The average corporate income tax of the OECD nations, excluding the US, has fallen from 38% in 1992 — which was the first year in which the average dropped below the U.S. level — to 25.5% today.

And 75 of the non-OECD countries have also dropped their corporate tax rates since 2006.

Now Japan has announced that effective next month, its corporate tax rate will drop, too. It will fall by 4.5%, to 35%. England is also lowering its rate next month, from the current 28% to 27%, on the way to a scheduled 24% within three years. That will leave the US with the highest rate in the developed world — a full 10% above the non-US OECD average.

If the US wanted to match the OECD average and China’s current rate (the rate was lowered in 2008), it would have to fall to 20% at the federal level. This is most unlikely under Obama’s regime.

So we will remain less competitive, and wonder why our unemployment remains high.




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Comments

Gary Jason

Reading some of the responses to my piece--which are similar to the reactions to my earlier piece on corporate taxes in January, called "At Least Some People Get It"--I guess I need to express my views on corporate taxes once again, slowly, for those who have a tendency to read in things that I never said.

Let's begin with an elementary logical distinction. A sufficient condition for a phenomenon is factor which by itself alone produces that phenomenon. A necessary condition for a phenomenon is a factor in whose absence the phenomenon won't occur. So, for example, water is certainly necessary for life, but hardly sufficient--you need more things than water to live (food, air, etc.).

As regards a prosperous economy, I have never argued that a low corporate tax is by itself a sufficient condition for prosperity, or even that a favorable business environment is. Much less have I ever, in the HUNDREDS of articles I have published in this journal, favored "corporate welfare." A favorable business climate is necessary for prosperity, however, and a low corporate tax is part of such an environment.

How low? Readers of these pages know my position well, since I have stated it repeatedly in past issues. I favor a flat 15% business AND personal income tax, with no deductions, exemptions, subsidies, tax credits, offsets, or anything else. Period, flat. I am sure that this would give government all the money it needs for its legitimate purposes. If it didn't, I would advocate consumption taxes to make up any shortfall. To provide stability, I would seek to make that income tax system a constitutional amendment.

As to whether business would support it, well, some would, some wouldn't. Let's have the fight and see what happens.

Finally, would such a low, flat tax by itself guarantee a favorable business climate? Hardly. No, we need to lighten regulation, repeal Obamacare, repeal Sarbanes-Oxley, repeal Dodd-Frank, enact more free trade laws, remove environmentalist barriers to responsible development of our natural resources, stop demonizing business, and do some other things as well. I have written articles on all of these topics. Together, those reforms would provide a good, reliable, and stable business climate.

But even that would not be sufficient (though it would help tremendously). We also need to reform government in a myriad of ways, not least by privatizing our public school system through vouchers to insure that all kids have a fair shot at a good education. Again, I have written a myriad articles on these matters.

But among all these other things, lowering the corporate income tax is certainly important. Sorry if mentioning that irks you, but then, that is your problem, not mine.

A Liberal in Lakeview

39.2%? Interesting number, but of course, there's at least one problem when citing such a number authoritatively.

Is that a weighted average or a straight one?

Furthermore, what counts is effective tax rate, not just the marginal rate, assuming that the marginal rate ever applies at all once exemptions are applied. Anyone who's ever prepared a tax return and, once finished, calculated his effective tax rate should be able to understand this.

So what's the real average marginal rate? What's the effective corporate tax rate? Is it 30%? 20%? Less than 20%? Does this rate account for subsidies, which would reduce the effective rate even further? I doubt it very much.

And what's the effective tax rate paid by foreign corporations? Does the story change radically in appearance when we evaluate the facts in this way? And how about economic rent? Can that, too, be legitimately factored in?

There's a lot of pissing and moaning about the corporate tax rate, but when was the last time that you heard the usual crowd of complaining shills united against welfare for businesspeople?

Well, never. Not. On. One. Single. Day.

As for the suggestion that the high nominal tax rate would be the culprit if unemployment remains high: Sorry, not convinced. That's correlation, only speculative thus far, which doesn't prove causation. And other possible causes are neglected.

But, as I argued earlier, the tax should be abolished altogether. So also the subsidization. So also incorporation itself.

Of course, the businesspeople don't want to give up the welfare, the looters don't want to stop double taxing the businesspeople, and even free market economists, often wrongly so called, habitually turn a blind eye to incorporation, which is interventionist.

Maybe what's needed to cut the knot is a contrarian approach. I have a solution.

Let's make the tax rate of 39.2% a tax on revenue. No deductions whatsoever. Every dollar of revenue will be taxed 39.2% The children will have an opportunity to pay back their welfare, and when the accountants are figuring gross margin, they won't have to worry about having enough money left after other expenses like interest expense.

Just think about the useless overhead in the tax dept. and outside counsel that could be shed. That savings could be used to pay for productive labor, too. The tax code will be simplified dramatically. Government will still be playing favorites, but at least some of the abuses will be elimited. In fact, businesspeople with corporate protections will get the simplifed tax code that they now only pretend to want.

In fact, wouldn't the relevant section of the tax code be just one line?

Section (1). The tax rate applicable to all revenues of incorporated businessness is 39.2% plus subsidies and less the tax rate of taxes paid to the States.

I predict that, like Hank Rearden, the American businessman will suddenly discover that he has an implacable hatred of crony capitalism.

Yeah, right. And John Galt wasn't in a big hurry to return to the world to scoop up distribution networks from bankrupt power companies and their creditors.

Gary Jason and others claim that the tax rate is 39.2%. Fine. Let's bring reality into line with fantasy. Afterward, if problems persist, we will have a factual basis for discussing the 39.2% tax rate, and in the meantime a tax code that is greatly slimmed down.

Erwin Haas

When corporate taxes are increased, businesses see this as an increaed cost of one of their raw materials and raise their prices, which all their consumers pay. If all of their competitors face the same cost structure then businesses have no reason to worry about taxes or the costs of other inputs, and customers be damned.

It's when costs are asymmetrical that problems for companies emerge. It's then that they have to either find someplace else to do business, or cease operations.

And so places as diverse as Delaware, the Cayman Isles and Ireland have had a booms because they offered lower taxes and regulations to companies.

And why the USA can expect a reverse boom.

Jon Harrison

According to this morning's New York Times, the corporate share of the nation's tax receipts has fallen from 30 per cent in the 1950s to 6.6 per cent today. This, according to the Times, can be attributed to the many loopholes that have been written into the code, plus creative accounting practices. Is the Times correct, or is it manipulating the facts to further its liberal agenda?

I believe the corporate tax rate was higher than 35% back in the Fifties. Yet US companies somehow survived and prospered. Suppose we reduced the corporate tax rate to 15%, while eliminating all corporate welfare and special breaks. Would U.S. corporations support such reform? Somehow I doubt it. Paying nothing (which some corporations apparently do, even when they are profitable) despite an on-paper rate of 35% is surely better than paying 15% in real dollars.

Don't mistake me, I support lowering the corporate rate to 25% or even lower, but I also support eliminating all corporate welfare and special tax breaks. The fact is that nobody is paying 39.2%. Corporate America has almost $2 trillion in cash on hand. If it's paying a 39% tax rate and still has all that money left over, then consumers must be getting ripped off big time by companies overcharging for their products and services.

A Liberal in Lakeview

Jon, why not just reduce the rate to zero?

Of course, there'd be an enourmous hue and cry, and not only from the leftists. Just think of all the tax attorneys who have heads full of knowledge about the relevant parts of the tax code. They'd have to look for new work. There'd be complaints that foreign owners are being subsidized, and there are plenty of people besides leftists who like the idea of digging their hands into business owners' pockets, which becomes easier to do when government sponsors businesses that grow larger as a result of the interventionism.

However, an advantage of eliminating taxation of corporations, improbable though such outcome may be, is that the road would be cleared for the abolition of incorporation altogether. Of course, that must be done province by province, and, of course, the redistributionists must be disabused of their love for taxing corporations.

Inevitably there'd be a quarrel about the rationalizations given for incorporation. But would a free market have this practice? Well, no. In a free market, or at least one less rigged and without government proclaiming the existence of corporations, businesspeople would solve organizational problems of their own choosing as best they can without the sponsorship of government. Whether they'd do so by sole proprietorships or partnerships would be for them to decide. In fact, why not just repeal the laws concerning those forms, too? Let the law be neutral about whether property is used for commerce or not.

But I suppose that the Wall Street crowd, too, wouldn't like that much. Lack of limited liability might make it difficult to entice buyers, impede transaction volume, and hurt commissions. Imperialists would howl about national defense being weakened and would demand exceptions for armaments makers. And so on and so forth.

Still, we need to choose:

(1) Interventionism and crony capitalism.
(2) No interventionism or crony capitalism.

When liberals, in the proper sense of the term, choose (1), they abandon liberalism itself. And if they defend incorporation, then they choose (1).

Guest

"Corporate America has almost $2 trillion in cash on hand. If it's paying a 39% tax rate and still has all that money left over, then consumers must be getting ripped off big time by companies overcharging for their products and services."

Nope.
Cash on hand is money already taxed. What that tells you is that the holders of that money are so uncertain of returns that they'd rather hold it than invest it.
Some 2,000 pages of Obamacare remain of uncertain effect on business healthcare costs; a *major* issue. EPA's attempt to regulate CO2 ditto. Tax changes to support the unions' health and pension costs ditto.
Holding cash isn't a bad strategy right now.

Jon Harrison

"Cash on hand is money already taxed." Right, I know that. That was the point. If they have that much left over after paying 39%, then they must be overcharging us. In fact, of course, they aren't paying 39%, which was my real point. I agree, by the way, that business has actly shrewdly by holding on to cash.

"How about zero?" Interesting point. But in my view we require a government and some public services, so taxes there must be -- let's just keep 'em low, and with a budget in balance. Now, I'm familiar with the argument that says taxes are a cost that is simply passed on to consumers, and of course that argument is 100% right. But that touches me only if I purchase something from Company X. If I don't use X's product or service, I don't lose out. And if I have to pay taxes, then as far as I'm concerned Company X should too. A minimum amount of government and public services are required to maintain a civilized society, in my view. Any company that is in business and making money should contribute to the cost. Just my opinion.

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