Larry Summers on the new Republican tax plan

by on January 9, 2017 at 12:47 am in Current Affairs, Economics, Uncategorized | Permalink

He summarizes the plan as follows:

The central concept put forward by Mr Ryan, which appears to have the support of Mr Trump, is to turn corporate income tax from a tax on the return to capital into a tax only on extraordinary profits. This would be done by taxing corporate cash flows. In addition to the major reduction of the overall rate, the system would change in three fundamental ways. First, all investment outlays can be written off in the year they occur rather than over time. Second, interest payments to bondholders, banks and other creditors will no longer be deductible. Third, companies will be able to exclude receipts from exports in calculating their taxable income and will not be permitted to deduct payments to foreign suppliers or affiliates from income.

I found this to be the paragraph I had not seen elsewhere:

Second, the tax change will capriciously redistribute income, increase uncertainty and place punitive burdens on some sectors. Think of a retailer who imports goods from abroad for 60 cents, incurs 30 cents in labour and interest costs, and then earns a 5 cent margin. With a 20 per cent tax, and no ability to deduct import or interest costs, the taxes will substantially exceed 100 per cent of profits even if there is some offset from a stronger dollar. Businesses that invest heavily, hire extensively and export a large part of their product will have negative taxable income on a chronic basis. It is hard to imagine that the political process will allow annual multibillion-dollar refunds, so they too may be victimised. Then there are the still unresolved questions of what the rules will be on interest deductibility for banks and of the treatment of businesses organised as partnerships that do not pay corporate taxes.

Here is the FT link, probably gated for most of you, WaPo link here.  Summers also argues the plan will worsen inequality, strengthen the dollar (possibly leading to EM crises), lead to a trade war, and erode the long-term tax base.

Just to refresh your memories here is Jared Bernstein on the same plan (mixed but mostly negative), and Martin Feldstein (positive).

1 DRE January 9, 2017 at 1:03 am

Are there a comprehensive set of reforms you would suggest that would *clearly* significantly improve the climate/incentives for business? It seems that the pro-business people may have a rare opportunity to make dramatic changes to a very sub-optimal federal incentive structure. I find it frustrating that the current proposals do not seem clearly good (as least judging by the reporting, which might not be the cleanest signal).

Re: topics for you to blog. IMO it’d be great if there was some way to shape the commentariat here closer to what’s on slatestarcodex.

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2 mulp January 9, 2017 at 3:12 am

Maybe an EITC that pays $20 per hour worked and paid at $1 to $10, government paid health care, no tax on profits, and a 50% tax on labor costs.

Thus the incentives will be to pay workers as little as possible reach economic profits in excess of 50 of revenue, with government funding most consumption by way of the EITC paid to 90% of the labor force.

For conservatives like the Kochs, profits should equal 100% of revenue and government make sure consumers have all the cash from tax refunds to grow gdp. Ie, businesses should never be responsible for funding consumer spending.

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3 Troll me January 9, 2017 at 3:51 am

Pro business people usually want “pro my business”, not general improvements in the business conditions. Hence, I think, the naming of promarket.org.

Businesses are not the only actors to be catered to in improving conditions for economic growth.

For example, if businesses regard me as a wage slave, I might prefer to spend a life in activism against wage slavery (not my actual position) instead of making widgets.

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4 tjamesjones January 9, 2017 at 10:45 am

why wouldn’t pro business people want general improvements in the business conditions? Think the burden of proof is on you to prove that one!

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5 Troll me January 9, 2017 at 12:42 pm

OBVIOUSLY they want improved business conditions in general.

But the specific ones they are most interested in are the ones which benefit them most. Often, with the result that they lobby for policies which are good for THEIR business but not for business in general or not for the economy in general.

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6 whatever January 9, 2017 at 11:44 am

IMO it’d be great if there was some way to shape the commentariat here closer to what’s on slatestarcodex.

The only way is a better commenting system (please!) and moderation. Some people and some specific words should be banned, temporarily or permanently. That requires work.

I find it interesting that so many people mention slatestarcodex, which means audience overlap, and yet the comments on SSC are so much better than here. This blog could be so much better.

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7 I Can Tolerate Anything except the Out Group January 9, 2017 at 1:21 pm

The comments on SSC are almost uniformly Right of Center. So I can see why some people of that perspective would think that that is great. However, SSC, and tons of other boards on the Net, are Far Right Safe Space Echo Chamber Bubbles. The Net has the desire/need for that covered totally. There need to be some boards that have a variety of perspectives and commenters, like this one.

Although I go to both boards, I much prefer this one, because I much prefer many perspectives. Only a tiny number of Left of Center people dare to comment on SSC. And you can’t mention the phrase “fake news” or various other banned words. I’ve been banned for a month over there before, because of mentioning propaganda and fake news.

And I am forever prohibited from mentioning the name of Saint Ayn Rand on SSC, due to my lack of love for her, which irritated someone on that board, and whose irritation was then defended and revenged by the moderator. Actually the moderator said I could regain the permission to use Rand’s sacred name, if I wrote a book report on her 2000 page book. This is something I could easily do, but my report on what I think of that book would surely get me banned for a month or longer again.

That being said, I find Scott Alexander to be an informative, reflective, and creative blogger, despite his moderation of his board being more rigid than what I would prefer.

Anyway, I myself am grateful that Tyler and Alex have a different sort of board here.

I think the U.S. is far too into polarization, echo chambers, safe spaces and bubbles. I don’t think we need more of them.

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8 whatever January 9, 2017 at 6:09 pm

I had in mind the neo-conservatives, etc., and not you at all, but ironically banning you or the constant irrelevancies you spew on SSC is part of what raises the level of discourse over there.

(You may not know this, but even talking of neo-conservative ideology was banned some time before you showed up.)

I am a big fan of diversity of thoughts, but I don’t think that ad hominem attacks or repeating the same old talking points counts as thought. So I don’t mind the banning of you and your constant mentions of Ayn Rand, in the same way that I don’t mind the banning or some of the more aggressive neo-conservatives, or words like “cucks” (not sure if it is banned, but you get the idea).

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9 Massimo January 9, 2017 at 1:15 am

The non-deductibility of imports is simply crazy. It will immediately increase inflation. Take IKEA, for example, they cannot source locally, they will increase prices immediately by 20%, or whatever the tax will be. At all effects, it is a flat tariff of 20% on every import. This guy seems to want to transform the US into North Korea. And think about the distortions: Boeing will become a purchasing company, making more money using the tax-credit to buy prosciutto and Camembert to sell to retailers at prices lower than the marginal cost, than producing planes.

The rest is fairly normal, I actually like the non-deductibility of interest costs.

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10 Shane M January 9, 2017 at 1:26 am

Thanks for perspective on inflation.

Can you speak to liking the non-deductability of interest expense. I don’t understand why this is good.
re: “Second, interest payments to bondholders, banks and other creditors will no longer be deductible.”

I probably shouldn’t post since I’m not an accountant, but I fail to see how taxing legitimate business expenses is fair to any business. Presently leveraged businesses would seem to be severely disadvantaged. Most capital intensive businesses fall into this category. For example, for the past 4 quarters Caterpillar has interest expense that exceeds net income. If I’m understanding properly, this rule would approximately double their pretax income over that time period, all else the same. (Caterpillar’s tax rate was about 19% over this time period).

If any accountants can post thoughts on this I’d appreciate. I’m trying to understand the case for why interest expense should be taxable.

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11 Ricardo January 9, 2017 at 2:19 am

The reason is to avoid giving preference to debt finance over equity finance. Corporate profits that get paid out as dividends are subject to double-taxation so taxing interest/coupon payments on debt is supposed to balance things out.

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12 Shane M January 9, 2017 at 2:41 am

Thank you. That makes sense.

Would you expect the proposed rules on non-deductibility of debt to have a large negative impact for banks in general (significantly reduce need for their services)?

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13 Ricardo January 9, 2017 at 5:25 am

Unless we reinstate Glass-Steagall, a lot of the bigger banks will be able to substitute equity underwriting and M&A activities to make up for the loss of any lending or bond underwriting business. Bank of America is, as far as I know, fairly active in the investment banking and securities underwriting world, for instance.

14 carlospn January 9, 2017 at 3:24 pm

“Bank of America is, as far as I know, fairly active in the investment banking and securities underwriting world, for instance”

BS. There is an unbridgeable gulf between retail banking and investment banking. BoA purchased Merrill Lynch in Q4 2008. They are totally different businesses.

Retail banking is process driven, with detailed procedures and stingy delegations of authority. Traders in investment banks have much larger delegations, with considerably more autonomy in what they can do.

To further confuse matters, JPMorganChaseChemicalBancOneMBNA and Goldman [& Morgan Stanley] each received banking licenses in 2008, in order to borrow at the Fed’s discount window. But they are investment banking/capital markets traders, not retail banks.

15 Troll me January 9, 2017 at 3:54 am

Possibly, debt finance forces more responsible behaviour by boards compared to equity finance, because implosion is possible. Implosion makes execs look really bad, so at the systemic level, it might be better.

Generally speaking, I’m more persuaded by arguments which point to the systemic risks of too much debt. But I think that’s gotta be considered as well.

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16 derek January 9, 2017 at 7:28 am

I would suggest the other way around. It has been used to prop up share prices by borrowing a low rates to mask poor business prospects. Essentially cashing out before collapse.

17 Boonton January 9, 2017 at 10:13 am

Why not simply allow businesses to deduct dividends or stock buy backs as an expense?

I buy a $100 bond issued by a company, the company pays $5 interest….that’s an expense for the company and income for me.

I buy $100 share of stock issued by a company. Company pays a $5 dividend…that’s an expense for the company and income for me.

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18 TMC January 9, 2017 at 2:42 pm

This does seem to be the simplest way to do it.

19 Shane M January 9, 2017 at 1:29 am

As I think about this, I guess I’m thinking I should be selling most of my retail stocks. Is there some countervailing benefit to retail that I’m misunderstanding? Even stores that focus on extremely cost-conscious customer like Wal-Mart, Dollar General, and Dollar Tree likely import a lot of stuff that would be hit by import taxes.

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20 AlanG January 9, 2017 at 8:29 am

It’s not just apparel, but lots of other things as well that will be subject to this new “tax” Go into any kitchen supply store and you will see almost everything there is imported and this includes the high end. IMO, this proposal is not thought through very well at all and there is no way in the world that this outsourced manufacturing can be brought back to the US in a timely manner such that inflationary pricing does not occur.

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21 Daniel Weber January 9, 2017 at 11:52 am

Honest question: Does any other major economy not allow businesses to deduct the cost of inputs that happen to come from outside the country?

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22 Brian January 9, 2017 at 2:00 pm

Currently the US business tax system is unique among the developed nations: It strongly disfavors companies that export, taxing them double or more what they would pay if located in other developed nations, and favors companies that import.

The proposed change would be exactly the opposite in the sense that it would strongly favor companies that export and strongly disfavor companies that import. It would still be unique in that no other developed country has such a system.

But there is a third option, of course. Like all the other developed nations, we could have a territorial tax system that treats foreign expenses as equivalent to local expenses and taxes only domestic profits. Domestic profits would include profits on exports of goods and services made in the USA, but not on those both made and consumed abroad; the USA currently taxes both.

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23 msgkings January 9, 2017 at 2:27 pm

This third option seems less likely to ignite a trade war to me, would you agree?

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24 Shane M January 9, 2017 at 1:47 am

I’d also appreciate perspective from those with a viewpoint as what tax changes countries that import/export from/to the US are likely to make in response to proposed US tax changes. In other words – what is likelihood of trade war? Do they similarly tax imports from the US in response, and favor exports to the US to offset the impact? thanks,

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25 stephan January 9, 2017 at 2:38 am

Feldstein ( and others) arguments is that the tax on imports will not make imports more expensive because the dollar will move up to exactly compensate. Is there a disagreement on this? Or is the argument that a strong dollar is undesirable ?

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26 bob January 9, 2017 at 8:27 am

Exchange rates are determined by lots of factors. I think that to say exchange rates may be true in theoretical sense but who knows what will happen. For example the pound depreciated after the Briexit vote and that had nothing to do with the short term trade outlook.

This proposal is essentially a 20% tariff since it evidently is a tax on the cost of the product, not on profits. Which means that Feldstein thinks that tariffs are economically benign, which is a surprising thing for a conservative economist to think.

Also, the opportunities for tax evasion are immense. Profits on domestic sales will be taxed at 20% while export sales will receive in effect a 20% tax credit on total costs and profit. How much of the expenses of the corporation aviation department will be assigned to export sales.

And maybe Wal-mart, which buys televisions for $175 and sells them for $250 will not want to pay the $35 tax and fimd a domestic supplier, who will chargep[ more than $175 so this will not increase real incomes.

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27 Steve January 9, 2017 at 3:07 am

Please let’s not opine too positively or negatively to the plan until the modelers have had a chance to quantify some of the effects.

One example of an overly quick reaction: “It is hard to imagine that the political process will allow annual multibillion-dollar refunds, so they too may be victimised.” Let’s say that a corporation started to produce losses as far as the eye can see (although it is economically profitable) under the new plan. The carry back rules allow losses to offset taxable income only for the past two years, so the maximum credit will be taxes paid for the past two years. Future tax losses will result in zero taxes, not tax refunds.

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28 prior_test2 January 9, 2017 at 3:51 am

‘I found this to be the paragraph I had not seen elsewhere:’

One hopes not – one assumes Summers is not a plagiarist.

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29 tjamesjones January 9, 2017 at 10:48 am

yes and because most left v right political arguments are as fresh as daisies.

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30 Scott Mauldin January 9, 2017 at 4:26 pm

This is not a left v. right argument, it’s a free trade vs. restricted trade argument, so a lot of these arguments are having to be concocted for the first time in a century.

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31 JC January 9, 2017 at 4:05 am

Taxing cash flows is a good way to simplify taxation but it is such a bad idea. Capex intensity is so variable across industries, way more than profitability differences (though it’s quite variable too).

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32 Pat January 9, 2017 at 4:17 am

It will be difficult politically to raise huge licks of revenue from importers only to pay it out to exporters and loss makers (where “loss” means earning less than a normal profit).
In principle though it would be a good move, particularly to get rid of the bias to debt financing.

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33 Adovada January 9, 2017 at 5:17 am

Wouldnt this encourage Ikea et al to direct market to consumers through e-commerce or will there be a tariff there somehow?

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34 derek January 9, 2017 at 7:16 am

Pretty dramatic. A very strong incentive to invest in what are now depreciated capital goods. Build buildings, vehicles, production equipment, computer hardware.

But the cost of borrowing will be increased. Interest rates increase by 20%. Since it is very cheap to start with, I don’t see this changing very much. Interest rate increases will have a multiplier. Considering that banking requires a tax payer bailout every few years, it could be considered an FDIC insurance payment that doesn’t get strained through the banks. A user pay insurance scheme for Wall Street bankers. I wonder how that will change the power dynamics in those markets?

Your competitor investing in China loses a 20% competitive advantage.

And if you are investing for export, building a manufacturing facility, there is a serious tax subsidy.

So if you are Intel, as they famously said that to build a plant in the US cost a billion dollars more than to build one somewhere else. Does this make a difference?

What it will stop is interesting. No more financing of equity buy backs. No more borrowing to build offshore production facilities.

It will force a reform of the equity markets. It is dwarfed by the debt market, and that ratio will change somewhat, and it will be forced to become a way of financing operations and investments as opposed to the weirdly detached game that it has become. I expect private equity to become even more influential.

Countries that live off of feeding the US consumer market are going to be pinched. If I were Justin Trudeau I would put a shirt on and get myself to Washington to renegociate NAFTA. Very quickly. He won’t though. He and the Canadian brain trust will view this an opportunity to wean Canadian business from their dependence on the US market. That will last about a month, then reality will intrude.

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35 derek January 9, 2017 at 7:19 am

Consider the removal of the interest rate deduction the Anti-TARP.

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36 bob January 9, 2017 at 8:34 am

There will be a huge move to asset based leasing. So Wal-mart, instead of borrowing money will sell thier real estate to a REIT and lease it back. They essentially can keep the deduction.

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37 Andrew Edwards January 9, 2017 at 4:19 pm

You mention PE gets more influential – do you think that is offset at all by the negative impact on the LBO model of debt-financed acquisition?

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38 Slocum January 9, 2017 at 7:30 am

“will not be permitted to deduct payments to foreign suppliers or affiliates from income”

Can that really be as bonkers as it sounds? If a company buys foreign made raw materials or components, they won’t be able to include the costs of those things in their profit and loss calculations!? What am I missing? How could that do anything other than, oh, say, destroy global supply chains and ignite trade wars?

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39 AlanG January 9, 2017 at 8:36 am

My gut feeling is that as with all tax proposals we won’t know the real outcome until it gets enacted and there are a couple of years experience with it. Right now everything is conjecture and we’ve seen some pretty decent economists weigh in both pro and con. There is no question that the corporate tax code needs to be reformed but it will be quite easy to go too far.

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40 anon January 9, 2017 at 8:38 am

If these off the wall ideas are intended for the first 100 days, we are in big trouble. If they are for 2018-2019, they have time to be fleshed and modeled.

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41 genauer January 9, 2017 at 9:01 am

This sounds even more crazy than the Smoots-Hawley Tariff

https://en.wikipedia.org/wiki/Smoot%E2%80%93Hawley_Tariff_Act

The idea that the rest of the world just watches blatant protectionism and violation of basic WTO rules

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42 Lord Action January 9, 2017 at 9:10 am

You’re going to see a lot of things like this piece over the next few months as people shill for the interests that pay them. The corporate tax reform will be disruptive, particularly so for some players. There will be winners and losers and the losers will be very upset. A conventional politician, reliant on big corporate donors, could not do this.

It’s analogous to getting rid of the home mortgage interest deduction. In the long term, it’s the right thing for the economy. But in the short run, it would be very disruptive and it would hurt some people (homeowners) while helping others (aspiring homeowners). And if you move against it, the NAR will come out in force.

In this case, you’ve got a tax code that incents US firms moving as much of their economic activity as possible to other nation’s tax regimes. If you change that, firms like the retail importer in the example, which are built around this aspect of the tax code, are going to have a hard time competing with firms not so reliant on the subsidy. More economically rational structures will win out. But that’s cold comfort for firms dependent on the old system.

I would prefer we just straight up move to a VAT and eliminate the profit tax altogether, though that’s not possible politically. But the proposal is a big step in the right direction.

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43 anon January 9, 2017 at 9:18 am

It is actually strange that we can’t VAT, something that is much better understood and tested. As simple as on invented here?

As I understand it, a light VAT, consistent with US historic tax rates, would be fairer to domestic producers, without being completely distortionary.

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44 eccdogg January 9, 2017 at 10:25 am

How could you remake this into a VAT without calling it a VAT.

I guess just redefine cost to include cost of foreign inputs purchased and some mechanism for splitting cost based on revenues. Cost associated with US revenues deductible, others not.

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45 stephan January 9, 2017 at 12:34 pm

a VAT applies to all domestic transactions as well. Then it’s like a sales tax

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46 anon January 9, 2017 at 1:56 pm

Sure, which makes it a viable alternative to corporate tax. Gasoline, or iphones, are taxed as they move through the pipeline.

The only question in my mind is whether computers are so cheap that the processing overhead is sufficiently low.

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47 Brian January 9, 2017 at 3:18 pm

What is being proposed is essentially a VAT that domestic companies do no have to pay. This is why it is pretty obviously a subsidy and against WTO rules.

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48 Brian January 9, 2017 at 3:19 pm

I just realized I am not the only Brian posting on this topic. Sorry to other Brian and to all for any confusion!

49 Brian January 9, 2017 at 2:11 pm

“In this case, you’ve got a tax code that incents US firms moving as much of their economic activity as possible to other nation’s tax regimes. If you change that, firms like the retail importer in the example, which are built around this aspect of the tax code, are going to have a hard time competing with firms not so reliant on the subsidy.”

Very astute. But on tax reform the best bet is the same as ever. There will be no changes in the tax code outside a few new lucrative breaks for narrow niches with good lobbyists. Trump is likely to be as frustrated as Obama in changing the tax code to force fewer jobs abroad. Even when Congress could benefit its own members prospects with a positive change, inertia nearly always prevails.

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50 Scoop January 9, 2017 at 9:47 am

Can someone please explain why the Republicans are opting for this rather than something that would be a) popular with the public and b) hard to undo when the democrats return to power ?

How about we abolish corporate taxation (which hinders competition by favoring large existing companies with its costs and complexities), force companies to distribute nearly all profits to individuals (retained cash can’t exceed, say, a year’s revenues) and then tax capital gains, dividends and everything else as common income?

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51 Daniel Weber January 9, 2017 at 11:37 am

force companies to distribute nearly all profits to individuals (retained cash can’t exceed, say, a year’s revenues)

I was thinking about this, and the problem is that companies just move things out of “cash.” Apple would end up buying instead of leasing all their office property and office equipment. (I don’t actually know that Apple doesn’t do this already, but it’s meant as a simple example.) You’d get a lot of money “spent” on things that are just meant as stores of value, although the IRS couldn’t necessarily prove it in court.

Maybe we just need a tax on all holdings, but it makes me nervous to even start looking down that path.

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52 dd0000 January 9, 2017 at 12:40 pm

“force companies to distribute nearly all profits to individuals (retained cash can’t exceed, say, a year’s revenues)”

Why on earth would you ever do this? That’s one of the worst ideas I’ve heard.

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53 Daniel Weber January 9, 2017 at 12:44 pm

If the rest of the plan is “don’t tax corporate earnings; tax them when received by a person as dividend or capital gain” you have to address the question of people just leaving the funds in the corporation to avoid tax incidence.

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54 Brian January 9, 2017 at 2:16 pm

There is already a retained earnings tax that does exactly this. The safe harbor is just $200,000. But cash and property that is part of a plan for operations or investment is excluded from the tax, so as the tax is currently applied any operating company can simply write a plan and be totally exempt.

Of course, an ambitious IRS could simply apply the rule differently to Apple and bring home $100 billion, but he would probably have to win in court to keep the cash.

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55 A Black Man January 9, 2017 at 9:49 am

This is where I break ranks with my fellow liberals. Business taxes are just stupid. They encourage the sorts of vote selling we see going on here. That and business taxes just end up in the price of the product or in the worker’s paycheck. Get rid of taxes on business and make up the difference by raising taxes on the rich. The simple way to do that is to impose a flat tax on income over a certain threshold. No deductions, not special treatment and no exemptions. This also allows for the elimination of charitable tax deductions, which is so abused as to give charity a bad name.

But, the Republicans just want to do the same thing the Democrats do, but with different team cheers. None of what they are proposing has a damned thing to do with tax relief or tax reform. It’s a public auction so that business will shower the GOP with cash in exchange for special deals.

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56 Dan in Euroland January 9, 2017 at 9:54 am

The goal of the liberal elite is to create a permanent underclass through which they can perpetuate their rule. Therefore they understand the public does not recognize the difference between actual and statutory tax incidence (i.e. the public has Tax illusion.)

Business and corporate taxes primarily fall on wages. So they are a mean through which the Lib can build a dependent populace by covertly stripping them of their wealth and the means to satisfy their needs without gov’t intervention.

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57 anon January 9, 2017 at 10:18 am

Flat taxes are grand, until someone actually calculates how high they have to be, then everyone goes silent. Rinse. Repeat.

On the other hand taxing a little here, a little there, raises $3.632 trillion in 2017 without anyone feeling singled out.

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58 tjamesjones January 9, 2017 at 10:54 am

yes good point. same goes for ‘basic income’, sounds great, but without exceptions either it’s too small to be useful, or you end up needing vastly more money than the current messy welfare systems.

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59 A Black Man January 9, 2017 at 11:04 am

Nice straw man.

We have examples of simple income taxes that work just fine. FICA is an obvious example. What I’m talking about is something similar. Leave the current personal tax system in place, but once income rises above a certain level, the rich guy tax kicks in at a certain percent above a certain income level.

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60 anon January 9, 2017 at 11:15 am

Funny that you say “straw man” to me, when you did not name a flat rate to replace both current income and corporate tax.

Estimates to replace current income tax alone run around 30%, don’t they?

http://www.forbes.com/sites/toddganos/2012/07/06/a-simple-federal-flat-personal-income-tax-system/

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61 anon January 9, 2017 at 11:18 am

(sorry, I didn’t understand “existing plus flat.” that works mathematically, but seems unlikely at this time. Trump and his billionaires..)

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62 Vivian Darkbloom January 9, 2017 at 1:11 pm

Right. But the problem is the charitable deduction. Neither party will touch it because the charitable industry lobby is too big and too powerful and politicians for both parties commonly work for “not-for-profits” as governments in waiting and political propaganda vehicles (for these folks it is very profitable). Other deductions are already effectively limited–e.g. Mortgage interest is effectively limited to mortgages on $1.1 million and less.

The undue influence the “not-for-profit” industry has on US policy and politics is under-estimated and under-reported.

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63 A Black Man January 9, 2017 at 2:18 pm

Correct. The 501(c)(3) scam is massive. There was a big stink made about targeting conservative groups by the IRS and maybe it was legit, but the scandal is that the IRS should hammering all of these operations. Even those not in politics are often just money laundering scams. The Clinton Foundation is exactly that, a way for the Clintons to legally take bribes from foreigners.

But you are correct. Short of a revolution, it will never be touched.

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64 TMC January 9, 2017 at 1:50 pm

How much of this pays for itself? Corp A has higher profits from lower taxes and pays -eventually- it out to the shareholders. Shareholders pay higher taxes. Should be same result without all the inefficiencies of the corporate tax system.

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65 A Black Man January 9, 2017 at 2:21 pm

If tomorrow the US simply dropped all taxes on corporations, the ports would be packed with people moving their business to the US. Of course, the rest of the world would follow suit, but the result is we would end up with many more business and many more executives to tax via the payroll.

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66 Andrew Edwards January 9, 2017 at 4:07 pm

I am also a liberal who likes this idea in principle, but what I always hang up on is the tax avoidance opportunities for wealthy individuals whose wealth sits largely in family office type corporations….

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67 Harun January 9, 2017 at 10:37 pm

You still have to keep those separate.

You could keep a 5% rate if you think its important.

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68 GoneWithTheWind January 9, 2017 at 10:07 am

I favor ending federal income taxes for businesses. If you want something to flourish end the taxes if you want to stifle it then tax it. End the federal taxes on business and you will also end the inequities of that tax

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69 gab January 9, 2017 at 1:53 pm

And I favor ending federal income taxes for individuals. Then individual income would “flourish (as you so delicately put it). End the federal tax on personal income and you will end the inequities of that tax.

Then let’s move onto capital gains, taxes on interest income, SS taxes etc.

Just think of the stimulus of all that tax elimination!

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70 Andrew Edwards January 9, 2017 at 4:10 pm

Interestingly, there isn’t a lot of empirical support for the idea that absolute tax levels have much relationship with overall economic growth. The relative taxation of different things (e.g. capital vs labor) can matter to the way economies organize, but the level of tax overall seems just totally unrelated to aggregate growth as far as I can tell. It’s a place where “Econ 101” theory really seems to run aground.

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71 egl January 9, 2017 at 11:13 am

This piece at http://freedomandprosperity.org/2017/publications/political-and-economic-risks-of-a-destination-based-cash-flow-tax/ that argues that the Ryan-Brady would reduce tax competition. Is this a credible argument?

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72 Effem January 9, 2017 at 11:31 am

Biggest blind spot (for both sides) – the more complicated a system, the more likely it will be gamed. And that process benefits the large/connected/rich. Whatever the policy, keep it simple. I’m not hopeful

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73 My Tribe Is the Only Virtuous Tribe January 9, 2017 at 1:27 pm

Why keep it simple. Trump is all about benefiting the large/connected/rich. His cabinet of crony capitalists is all set to gorge themselves at the public trough.

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74 Andrew Edwards January 9, 2017 at 4:16 pm

Two questions I have

Does the in-year deduction of capital expense really matter? I would expect that for reporting purposes the accountants would still make the company amortize the costs and benefits over the life of the capital project, so reported earnings wouldn’t be that different (and everyone would continue to need books to track tax treatments seperate from financial reporting books). Cash flows would be pulled forward a bit, but that’s only a small benefit not a big one – it’s material but not a game-changer if I’ve got the right end of the stick on this one….

What happens to capital markets as firms massively reduce leverage? I figure you issue new equity and use that to buy back your debt, right? So a flood of share offerings maybe pushes down equity market valuations, and interest rates on corporate debt decline massively as it gets bought back. This is probably good in general but could be quite a mess, and further tightens the market for assets that deliver yield beyond an already-tight market today.

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