Monday, January 06, 2014

Time to abolish the corporate tax? Part 2: Only fools or shills would agree

Yesterday we posted a blog looking at a New York Times editorial entitled Abolish the Corporate Income Tax, exposing many of the numerous fallacies and misunderstandings at the base of it. Forgive us for going on about this, but it is important.

Now Citizens for Tax Justice in the U.S. has produced an article of their own, which complements ours and adds several more important points. It starts like this:
Another year, another campaign to give even bigger breaks to corporations and claim that this will create jobs. In 2014, the campaign opened with a January 5 op-ed by Laurence Kotlikoff in the New York Times titled, “Abolish the Corporate Income Tax.”
And it is a campaign: in the United States, the United Kingdom - everywhere, really. It's based on ideology, not practical realities. A U.S.-based correspondent to TJN, with many connections in U.S. tax circles, added in an e-mail yesterday:
"Larry is a leading right-wing Boston U economist who is otherwise best known as a former Reagan Council of Econ advisor and a deficit hawk. He means well, but he is generally clueless when it comes to the Real World. Unfortunately his piece is only the latest in a crescendo of right wing voices calling for abolition in the US. And the idea is gaining traction in business circles."
Our arguments yesterday - and CTJ's arguments to follow - illustrate that if you support the abolition of the corporate income tax you either have no idea what you are talking about, or you are a shill. We can't think of another explanation (apart from where you are a mix of both.)

Our correspondent reminded us, as we suggested yesterday:
Such a move by the world's largest economy would badly hurt developing countries like Argentina that count on corporate income taxes and MNCs for a large share of their revenue base. It would dramatically accelerate global tax competition -- the race to the bottom. 
(We at TJN have decided to stop using the term 'tax competition' and instead use the more accurate term 'tax wars' - which is what we are talking about here. Occasionally, if we do use the more common term, we will put 'competition' in quote marks.)

Back to CTJ. Their article continues by explaining, as we did, how the corporate income tax serves as an essential backstop to the personal income tax.
"First, the personal income tax would have an enormous loophole for the rich if we didn’t also have a corporate income tax. A business that is structured as a corporation can hold onto its profits for years before paying them out to its shareholders, who only then (if ever) will pay personal income tax on the income. With no corporate income tax, high-income people could create shell corporations to indefinitely defer paying individual income taxes on much of their income.

Second, even when corporate profits are paid out (as stock dividends), only a third are paid to individuals rather than to tax-exempt entities not subject to the personal income tax. In other words, if not for the corporate income tax, most corporate profits would never be taxed."
Crucial points. They then expand on our point about tax 'incidence':
"The corporate income tax is ultimately borne by shareholders and therefore is a very progressive tax, which means repealing it would result in a less progressive tax system.

This last point deserves emphasis. Proponents of corporate tax breaks argue that in the long-term the tax is actually borne by labor — by workers who ultimately suffer lower wages or unemployment because the corporate tax allegedly pushes investment (and thus jobs) offshore. But most experts who have examined the question believe that investment is not entirely mobile in this way and that the vast majority of the corporate tax is borne by the owners of capital (owners of corporate stocks and business assets), who mostly have high incomes. This makes the corporate tax a very progressive tax.

For example, the Department of the Treasury concludes that 82 percent of the corporate tax is borne by the owners of capital. As a result, the richest one percent of Americans pay 43 percent of the tax, and the richest 5 percent pay 58 percent of the tax."
And then they make another argument that we didn't make.
"Kotlikoff argues that our corporate income tax chases investment out of the U.S. and his simplistic answer is to repeal the tax altogether. He writes that, “To avoid our federal corporate tax, they [corporations] can, and often do, move their operations and jobs abroad,” and cites the well-known case of Apple booking profits offshore.

But Apple is a perfect example of a corporation that does not actually move many jobs offshore but rather is engaging in accounting gimmicks to make its U.S. profits appear to be generated in offshore tax havens. These gimmicks take advantage of the rule allowing American corporations to “defer” (delay indefinitely) paying U.S. corporate income taxes on the profits they claim to earn abroad. Lawmakers will end these abuses when they see that voters’ anger over corporate tax loopholes is even more powerful than the corporate lobby."
And, as we also mentioned:
"Kotlikoff has constructed a computer model that purports to prove that the economy would benefit greatly from cuts in the corporate income tax. But any such model relies on assumptions about how corporations would respond to changes in tax policy. Economists have failed to demonstrate a link between lower corporate taxes and economic growth over the past several decades that would justify the assumptions Kotlikoff uses."
And let's not forget something else that that last report CTJ cites mentions:

"The Corporate Income Tax raises a significant amount of revenue for the federal government—$242.3 billion in fiscal 2012, or almost 10 percent of total federal revenues. However, the corporate income tax is less important now than in the 1950s, when it accounted for about 30 percent of total revenues."

Our last blog cited a range of reasons why we need the corporate income tax - and why, in fact, it is a particularly precious tax. CTJ also has its own overlapping, but different, list. It's here. And it's well worth reading.

A final note: back to our correspondent, who makes a rather sobering observation:
"Some of us are taking the international corporate income tax for granted, and are trying to improve it -- by, for example,  refining the OECD's recent attempts to fix digital tax regimes and the the arms-length pricing approach to international corporate taxation, or by pursuing longer term objectives like  country by country reporting or  formulary apportionment.

These are worthy long term objectives.   But let us not forget that they PRESUME that countries still have corporate income tax regimes to enforce in the first place. So it is time to take seriously this latest very aggressive strategy by  the US Right and respond to it vocally."
And let's not forget: this doesn't just affect the United States. This affects everyone in the whole world. And it's potentially a very, very dangerous move that would have horrific effects on income and wealth economy, rent-seeking and much more. This campaign must be stopped.

Update April 2014: for information on corporate tax see here.


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