Results for “corporate tax”
187 found

Should there be a tax on corporate income at all. For and against.

by  Tyler Cowen in

That is a reader request.  I used to think the ideal tax rate on corporations should be zero, but that is no longer my view.  For one thing, too many individuals would find ways to self-incorporate, thereby avoiding personal income taxes on labor income.  Note that a small corporation controlled by you can return real income to you in a variety of non-taxable or less-taxed ways.

Furthermore, tax-exempt institutions such as non-profits and pension fund would end up owning too many corporations, to the detriment of (non-tax) efficiency.  While pension funds eventually must pay out that income in the form of pensions, those often go to high-wealth, low income elderly individuals, and thus would never end up taxed at such a high rate.

I now think that for the United States the tax rate on corporate income should be in the range of 18-25 percent, depending of course on what other decisions we make with our budget and tax systems.  It also would work to simply target the OECD average of the corporate rate.

A further question is whether the case for a zero corporate rate would be stronger if we shifted from income to consumption taxation.  That depends how easy it might be to partially evade the consumption tax, say by spending money abroad.  In general, to the extent evasion is possible that favors lower marginal tax rates but levied on a greater number of distinct points in the system, including in this case on the corporate veil.

I thank Megan McArdle for a useful conversation related to these points.

How might corporate income tax be changed?

by  Tyler Cowen in

This is what is circulating in the House, Trump and the Senate have yet to influence it directly:

KEY DIFFERENCES BETWEEN CURRENT U.S. CORPORATE TAXES AND HOUSE GOP PROPOSAL

Corporate Tax Rate:
Current: 35%
Proposal: 20%

Capital Expenses:
Current: Depreciated over time
Proposal: Deducted immediately

Interest Expenses:
Current: Deductible.
Proposal: Net interest expense not deductible

Basis for Location of Taxation:
Current: Profits
Proposal: Sales

Taxation of Foreign Profits:
Current: Pay foreign tax, pay U.S. tax upon repatriation, minus foreign tax credits
Proposal: Generally repatriated without U.S. taxes, after one-time transition tax

Border Adjustments:
Current: None
Proposal: Tax applied to imports, removed from exports

There is more at the WSJ link, a very clear and useful piece by Richard Rubin.  Do note that a stronger dollar — which we already see — will undo some of this effort to put American exports on a stronger footing.  And deducting capital expenses immediately seems like an attempt to goose up the current economy in an unwise and unsustainable fashion.  The lower corporate tax rate is a good idea.  What are your opinions on these changes?

Should we still get rid of the U.S. corporate income tax?

by  Tyler Cowen in

I know this argument runs against the mood affiliation of our times, but the arguments for eliminating the corporate income tax still seem pretty good to me.  Here is a recent paper by Hans Fehr, Sabine Jokisch, Ashwin Kambhampati, and Laurence J. Kotlikoff.  The abstract runs as follows:

We simulate corporate tax reform in a single good, five-region (U.S., Europe, Japan, China, India) model, featuring skilled and unskilled labor, detailed region-specific demographics and fiscal policies. Eliminating the model’s U.S. corporate income tax produces rapid and dramatic increases in the model’s level of U.S. investment, output, and real wages, making the tax cut self-financing to a significant extent. Somewhat smaller gains arise from revenue-neutral base broadening, specifically cutting the corporate tax rate to 9 percent and eliminating tax loop-holes.

The NBER copy is here.  An ungated copy you will find here (pdf).

Our corporate income tax

by  Tyler Cowen in

Cato tells it like it is:

The United States should be a leader but has fallen behind on tax reform. For example, the United States now has one of the highest corporate tax rates among major nations. The chairman of the president’s Council of Economic Advisers, Glenn Hubbard, believes that “from an income tax perspective, the United States has become one of the least attractive industrial countries in which to locate the headquarters of a multinational corporation.” …

One-third of the sales of the 500 largest U.S. companies is now from their foreign affiliates. …

A new survey by the accounting firm KPMG, which takes into account both national and subnational taxes, found that the average 40 percent U.S. federal and state corporate rate combined is almost 9 percentage points higher than the OECD average in 2002 of 31.4 percent. …

In all there are six often-overlapping anti-deferral regimes that create a complex web for Americans to navigate through when investing abroad. The U.S. international tax rules are generally considered the most complex and aggressive among the industrial nations. In a 1999 report, the National Foreign Trade Council concluded that “U.S. anti-deferral rules have been subject to constant legislative tinkering, which has created both instability and a forbiddingly arcane web of rules, exceptions, exceptions to exceptions, interactions, cross references, and effective dates, giving rise to a level of complexity that is intolerable.” …

The complexity of tax rules on U.S. foreign income is so great that one estimate found that 46 percent of federal tax compliance costs for Fortune 500 companies stemmed from rules on foreign income. As a result, U.S. companies are at a tax disadvantage in world markets. … Intel’s vice president for taxes testified before Congress that, “if I had known at Intel’s founding what I know today about the international tax rules, I would have advised that the parent company be established outside of the U.S.”

Thanks to RegionsofMind for the link. My bottom line: I’d rather have cut the corporate income tax than have cut the tax on dividends.

Reforming the corporate income tax

by  Tyler Cowen in

Not as sexy a topic as cads and dads, see immediately below. But here is the best short article I have seen on why we should reform the corporate income tax.

Levi Strauss was able to put about $100,000 into a sham Brazilian venture that netted it $180 million in tax deductions. And it was all perfectly legal.

The answer?:

Loopholes need to be closed, rules simplified and the 35 percent rate reduced. And serious thought has to be given to augmenting the corporate tax with an export-friendly value-added tax like the ones used by nearly every other industrial country.

I agree with the first sentence of that paragraph, but not the second. I worry about the transition costs to a VAT, I expect we would end up with both a VAT and an income tax and on that one I vote no.

The California tax burden is driving people out

by  Tyler Cowen in

That is the topic of my latest Bloomberg column, here is one bit:

California’s highest income tax rate is 13.3%. That is in addition to a top federal tax rate of 37%. California also has a state sales tax rate of 7.25%, and many localities impose a smaller sales tax. So if a wealthy person earns and spends labor income in the state of California, the tax rate at the margin could approach 60%. Then there is the corporate state income tax rate of 8.84%, some of which is passed along to consumers through higher prices. That increases the tax burden further yet.

And this:

Researchers Joshua Rauh and Ryan Shyu, currently and formerly at Stanford business school, have studied the behavioral response to Proposition 30, which boosted California’s marginal tax rates by up to 3% for high earners for seven years, from 2012 to 2018. They found that in 2013, an additional 0.8% of the top bracket of the residential tax base left the state. That is several times higher than the tax responses usually seen in the data.

These high-earning California residents seem to have reached a tipping point: Maybe many of them could afford the extra tax burden, but at some point they got fed up, read the signals and decided the broader system wasn’t working in their interest.

Overall, Proposition 30 increased total tax revenue for California — but not nearly as much as intended. Due to departures, the state lost more than 45% of its windfall tax revenues from the policy change, and within two years the state lost more than 60% of those same revenues.

Here is an AEA link (gated) to the original research.

Do tax increases tame inflation?

by  Tyler Cowen in

Here is a new AER article by James Cloyne, Joseba Martinez, Haroon Mumtax, and Paolo Surico.  After an extensive data analysis, they arrive at this conclusion:

Based on US federal tax changes post–World War II, our answer is “yes” if personal income taxes are increased but “no” if corporate income taxes are increased.

Of course this is consistent with the view — no longer so commonly admitted — that higher corporate tax rates do have negative supply side effects.  There is an ungated version of the paper here.

At what rate should we tax AI workers?

by  Tyler Cowen in

I find this (somewhat) tractable problem one good way to start thinking about alignment issues.  Here is one bit from my Bloomberg column:

More to the point, there are now autonomous AI agents, which can in turn create autonomous AI agents of their own. So it won’t be possible to assign all AI income to their human or corporate owners, as in many cases there won’t be any.

And to continue the analysis:

One option is to let AI bots work tax-free, like honeybees do. At first that might make life simple for the IRS, but a problem of tax arbitrage will arise. Tax-free AI labor would have a pronounced competitive advantage over its taxed human counterpart. Furthermore, too many AIs will be released into the commons. Why own an AI and pay taxes when you can program it to do your bidding, renounce ownership, and enjoy its services tax-free? It seems easy enough to disclaim ownership of autonomous bots, especially if they are producing autonomous bots of their own. If nothing else, you could sell them to shell corporations.

The obvious alternative is to tax AI labor. Laboring AIs would have to file tax returns, which they may be capable of doing in the very near future. (Can they claim deductions for their baby AIs? What about their investments?)

Since AIs do not enjoy leisure as humans do, arguably their labor should be taxed at a higher rate than that of humans. Still, AIs shouldn’t be taxed too much. At prohibitively high rates of taxation, AIs will have lower stocks of wealth to invest in improving themselves, which in turn would lower long-run tax revenue from AI labor. Yes, they’re AIs, but incentives still matter.

Some people might fear that super-patient, super-smart AIs will accumulate too much wealth, though either investments or labor, and thereby hold too much social influence. That would create a case for a wealth tax on AIs, in addition to an income tax. But if AIs are such good investors, humans will also want the social benefits that accrue from such wisdom, and that again implies rates of taxation well below the confiscatory level.

And here is one of the deep problems with AI taxation:

The fundamental problem here is that AIs might be very good at providing in-kind services — improving organizational software, responding to emails, and so on. It is already a problem for the tax system when neighbors barter services, but the AIs will take this kind of relationship to a much larger scale.

Forget about hiring AIs, actually: What if you invest in them, tell them to do your bidding, repudiate your ownership, and then let them run much of your business and life? You could write off your investment in the AI as a business expense, and subsequently receive tax-free in-kind services, in what would amount to a de facto act of exchange.

Here is one general issue:

A major topic in AI circles is “alignment,” namely whether humans can count on AI agents to do our bidding, rather than mounting destructive cyberattacks or destroying us. These investments in alignment are necessary and important. But the more successful humans become at alignment, the larger the problem with tax arbitrage.

Not easy!

Corporate campaign spending doesn’t matter much

by  Tyler Cowen in

To what extent is U.S. state tax policy affected by corporate political contributions? The 2010 Supreme Court Citizens United v. Federal Election Commission ruling provides an exogenous shock to corporate campaign spending, allowing corporations to spend on elections in 23 states which previously had spending bans. Ten years after the ruling and for a wide range of outcomes, we are not able to identify economically or statistically significant effects of corporate independent expenditures on state tax policy, including tax rates, discretionary tax breaks, and tax revenues.

That is from a new paper by Cailin R. Slattery, Alisa Tazhitdinova, and Sarah Robinson.

The new tax on stock buybacks

by  Tyler Cowen in

Democrats opted to seek a new 1 percent tax on corporate stock buybacks, a move that would make up at least some of the revenue that might have lost as a result of the [Sinema-driven] changes.

Here is further detail.  Something has to be taxed, and I don’t pretend to have a comprehensive ranking of tax options from best to worst.  I can’t tell you where this might rank on the list.  I can however tell you these three things:

1. This is flat out a new tax on capital, akin to a tax on dividends.

2. Are you worried about corporations being too big and monopolistic?  This makes it harder for them to shrink!  Think of it also as a tax on the reallocation of capital to new and growing endeavors.

3. The real reason this is being proposed is because so many Democratic and left-leaning public intellectuals have written “flat out wrong, doesn’t matter what your partisan stance is” pieces on stock buybacks.

And there you go.

How do low real interest rates affect optimal tax policy?

by  Tyler Cowen in

Alan Auerbach and William Gale have a new paper on this topic:

Interest rates on government debt have fallen in many countries over the last several decades, with markets indicating that rates may stay low well into the future. It is by now well understood that sustained low interest rates can change the nature of long-run fiscal policy choices. In this paper, we examine a related issue: the implications of sustained low interest rates for the structure of tax policy. We show that low interest rates (a) reduce the differences between consumption and income taxes; (b) make wealth taxes less efficient relative to capital income taxes, at given rates of tax; (c) reduce the value of firm-level investment incentives, and (d) substantially raise the valuation of benefits of carbon abatement policies relative to their costs.

One core intuition here is that as the safe return goes to zero, capital taxes are not especially burdensome compared to consumption taxes.  Of course “the safe return” may not be entirely well-defined within a corporate context, and capital taxes often hit returns to risk as well, so this is a bit more complicated than the abstract alone would indicate.

The authors also offer this intuition, which I do not quite follow:

In simplified environments, a wealth tax can be written as an equivalent tax on capital income. As the rate of return falls, the equivalent income tax rate of any given wealth tax rises. That is, a given wealth tax rate becomes more distortionary relative to a given capital income tax as the rate of return falls.

One of my biggest worries about a wealth tax is that it takes resources away from people who at the margin seem to be good at generating extra-normal returns.  That comparative advantage might be more important as the safe rate goes to zero.  So I am fine with the conclusion of the authors, but not sure if their intuition is equivalent to mine (I suspect it is not).

This one is clearer to me:

A major focus of potential tax reform has been the treatment of capital gains, given their tax-favored status, their high concentration among the very wealthy, and the distortions that the current method of taxation causes. A key element of the current system of capital gains taxation
is the lock-in effect, which discourages the realization of gains to take advantage of deferral of taxation. With very low interest rates, the deferral advantage loses much of its relevance, and this can make relatively simple reforms (such as taxing capital gains at death) achieve results very similar to more complicated schemes (such as taxing capital gains on accrual, even when not realized).

Overall this paper is very interesting and thought-provoking.  Nonetheless, until we understand better why the safe rate of return has diverged so radically from “typical” (but still risky) corporate rates of return, I am not sure what implications we can draw from the model.

Tax incidence on competing two-sided platforms

by  Tyler Cowen in

That is a paper by Paul Belleflamme and Eric Toulemonde, from a few years ago:

We analyze the effects of various taxes on competing two-sided platforms. First, we consider nondiscriminating taxes. We show that specific taxes are entirely passed to the agents on the side on which they are levied; other agents and platforms are left unaffected. Transaction taxes hurt agents on both sides and benefit platforms. Ad valorem taxes are the only tax instrument that allows the tax authority to capture part of the platforms’ profits. Second, regarding asymmetric taxes, we show that agents on the untaxed side benefit from the tax. At least one platform, possibly the taxed one, benefits from the tax.

This may all turn out to matter more if the new multinational corporate tax regime comes into existence.  Of course you can vary the assumptions further yet, and get additional and differing results, but please keep in mind: the tax you impose is not the incidence you get.

Summers on the Wealth Tax

by  Alex Tabarrok in

Larry Summers is my favorite liberal economist because even while maintaining his liberal values he never stops thinking like an economist. That makes him suspect among the left but it means that he is always worth listening to. The video below with Saez, Summers and Mankiw (with Rampell moderating) is excellent throughout. I cribbed a number of points from Summers:

“I have studied last week’s twitter war very carefully and I have to say that I am 98.5% convinced by the critics that the Zucman-Saez data are substantially inaccurate and misleading.”

The arguments around political power are not persuasive. Most of what is wrong with politics is because that is what the people want (I’m filling in a bit here from comments throughout). A wealth tax does nothing about corporate lobbying and would increase the incentive to give to political organizations. If you cut wealth at the top by 30% that wouldn’t change relative political power in the slightest.

Wealth is up in large part because interest rates are down which means that permanent income hasn’t increased.

Forced savings programs like social security and unemployment insurance mean that people at the bottom need to save less and thus their wealth falls even as their welfare increases.

A wealth tax increases the incentive to consume instead of save and invest.

On employee stock ownership plans: “When you put workers in control of firms and you give them substantial control–see Israeli kibbutz’s, see Yugoslav cooperatives, see universities where faculties have a powerful voice–the one thing you do not get is expansion. You get more for the people who are already there. That does not seem to be an attractive position for progressives.”

In the Q&A Summers just goes to town on Saez when Saez claims 90% tax rates are a great American invention. “The people who were around in the Kennedy administration who were at least as progressive as you are were united in the belief that 90% tax rates were a bad idea….The number of people who paid those 90% tax rates was trivial and it wasn’t because there weren’t a lot of rich people.”  Greg Mankiw, who gives a nice parable in his remarks, has to stifle a laugh as Summers lets rip.

The body language in the Q&A is very interesting.

The three percent digital tax

by  Tyler Cowen in

France among other nations has been calling for a three percent digital tax, for instance as might apply to Facebook revenue connected to France but booked say to Ireland, which has a lower corporate tax rate.  (The exact meaning of “connected to France” is indeed murky here, if you are wondering, but proponents might have in mind a simple France-to-France transaction, such as selling an ad to a French buyer for a French product; there are more complicated grey areas.)

As is so often the case, the debate is focusing on how little tax some of the major tech companies pay directly to the French treasury, rather than on tax incidence.  In reality, the major tech companies may already be bearing a quite significant tax burden.

Let’s say you believe that Facebook has significant market power over the advertising market in France.  That is not exactly my view, but let’s run with it — a competitiveness assumption will hardly boost the case for taxing Facebook.

At this point your mind already may be thinking that the monopolist in the supply chain will bear some significant portion of a tax, just as land bears tax burdens in a Georgian land monopolist model.

Let’s now say that France boosts its VAT — how will that impact Facebook?  Well, the short-run effect is that directly taxed good and services will tend to cost more.  That in turn will create pressures for them to advertise less, because their potential market size and potential profits are smaller.  If they advertise less, they are spending less money on Facebook ads.  Facebook profits go down (remember, Facebook is selling those ads above marginal cost), and thus Facebook bears some of the burden of the tax.

Do the same analysis in terms of levels rather than changes, and you will see that Facebook bears some of the burden of the current French VAT.

So the French VAT brings money into the French treasury, and some of that money comes from Facebook in an indirect form, in addition to whatever direct tax liabilities Facebook may bear under the current French VAT structure.  Furthermore, the net tax burden on Facebook is higher, the more monopolistic is Facebook in the ad market.

I should note that there are other ways you can play around with the assumptions.

A good rule of thumb is that you should place less weight on tax discussions that do not focus obsessively on tax incidence.