Results for “corporate tax” 187 found
Taxes and innovation: shout it from the rooftops
We find that taxes matter for innovation: higher personal and corporate income taxes negatively affect the quantity, quality, and location of inventive activity at the macro and micro levels. At the macro level, cross-state spillovers or business-stealing from one state to another are important, but do not account for all of the effect. Agglomeration effects from local innovation clusters tend to weaken responsiveness to taxation. Corporate inventors respond more strongly to taxes than their non-corporate counterparts.
That is from a new NBER paper by Ufuk Akcigit, John Grigsby, Tom Nicholas, and Stefanie Stantcheva, via Adam Ozimek.
The hidden taxes that challenge women
That is the new and excellent Sendhil Mullainathan NYT column, here is one excerpt from many good points:
Corporate success has similar consequences: Women who become chief executives divorce at higher rates than others.
Another study found that the same is true in Hollywood: Winning the best actress Oscar portends a divorce, while winning the best actor award does not.
Of course, the divorce itself may be a preferred outcome, one that is better than enduring a poisonous relationship. Even then, I’d argue that the tax was exacted in the emotional toll and the time lost in a failed marriage.
Men react particularly negatively to their spouses’ relative success. Marianne Bertrand and Emir Kamenica, economists at the University of Chicago, and Jessica Pan, an economist at the National University of Singapore, examined the wages of spouses. Because women generally earn less in the work force, they generally earn less than their husbands, too.
What is more surprising in the data is that it is far more common for the husband to earn just a tiny bit more than the wife than the other way around. The fact that women on average earn less does not account for such a sharp asymmetry.
The piece is interesting throughout.
This seems whacky, yet I cannot refute it (from the comments), tax incidence department
Here is an unrelated topic, but part of the general topic of tax incidence. Do federal employees pay income tax on their wages? I know they do nominally, but that tax goes back to their employer, the federal government. So, doesn’t that mean that, while their actual salary may be lower than their official nominal salary, they actually don’t pay any tax? (NB: this is quite different from a private sector employee whose after-tax salary is less than the pre-tax salary. In that case, the difference between the two does *not* go to the employer, creating a gap between what the employer pays and what the employee receives.)
For example, suppose a private firm and the federal government both value a worker’s output at $100k/yr and the tax rate is 20%. The private firm offers the worker $100k and the worker receives $80k after paying taxes. The federal government, however, can offer the worker $125k in nominal salary, *knowing that it will receive $25k back in income tax*. The net result is that the federal government pays $100k and the worker receives $100k after taxes, i.e., the worker earns $100k tax free, $20k more than he or she would earn at the private firm. Another way of seeing this is to note that taxes paid by employees are economically equivalent to taxes paid by employers. So, if employers received rebates for income taxes paid by employees, then the net income tax would be zero. Well, the federal government *does* receive a rebate for all income taxes paid by employees!
Doesn’t this mean that taxes are doubly distortive? Not only do they discourage employment by creating a gap between what (private) employers pay and what workers receive — the usual cited distortion — they also distort the *composition* of the workforce by allowing the federal government to crowd out other employers.
That is from BC.
Should we tax the endowments of wealthy universities?
This NYT story has some background detail:
The House Republican tax plan released on Thursday includes a 1.4 percent tax on the investment income of private colleges and universities with at least 500 students and assets of $100,000 or more per full-time student. It would not apply to public colleges.
The endowments are currently untaxed, as they are considered part of the nonprofit mission of the colleges. The new tax, if it passed, would bring in an estimated $3 billion from 2018 to 2027, one of many new revenue sources Congress is considering to pay for broad tax cuts.
Note that this would apply to about 140 schools, and also that private foundations already pay tax on their investment income. Greg Mankiw writes:
If my rough calculations are correct, the tax would cost schools like Harvard between $1,000 and $2,000 per student every year.
I am opposed to this change, mostly because I don’t like to see the government deciding to go after a new source of wealth for its tax base. The focal point of non-interference ceases to be focal, and excesses and politicization too often follow. Slippery slope!
But if you are otherwise not so keen on this Brennan-Buchanan argument, what exactly are the grounds for opposing this? It taxes the relatively wealthy, and it taxes income from wealth. It taxes finance. I haven’t heard anyone oppose the tax on the investment income of private foundations, other than diehard anti-tax types. That tax has hardly vanquished the private foundation form. On top of all that, university endowments seem to have long time horizons, and to play the g > r game pretty well. As early as 1958, Paul Samuelson taught us we can transfer resources out of g > r games at no real cost.
So, you’ll hear a lot of caterwauling on this one, but the only good arguments against it are the libertarian ones. Broadening the base isn’t always good. Don’t be suckered by the “give up education for tax cuts for millionaires” non-rigorous rhetoric you will hear. With or without those tax cuts, you still have to ask yourself whether this tax hike is a sensible way of paying off our huge and growing debt.
I wonder if there are people who think a corporate income tax falls mainly on capital, but that this levy would fall mainly on students. Actually…I don’t wonder.
How simple can tax reform get? (from the comments)
The corporate income tax could be reduced to zero if all corporations were treated as pass-thru’s. However, for a variety of technical and practical reasons (too lengthy to discuss here), that is not feasible. Under the current regime, many businesses have the option to be treated as pass-thru’s (e.g., LLC’s and partnerships) and thus taxed only once at the individual rate, but for most publicly traded and very large entities, entities with foreign shareholders, etc., that is not possible or practical. One could also consider an imputation system such as used by the UK, but that is also messy.
The ideal system should treat all income at the same rate, regardless of the form of business. Currently, corporate income (including distributions) is subject to a higher rate than income from non-corporate entities. The federal marginal rate is currently 48 percent (35% + (.20 x .65) = 48%) compared with a marginal rate of 39.6% on ordinary income. These rates should be equalized and, preferably, the rate of corporate tax and the rate on distributions should also be roughly equal in order not to discourage corporate re-investment over distributions or vice versa and therefore avoid undue distortion regarding decisions on the allocation of capital. Thus, at the current marginal rate of 39.6%, the current proposal of a corporate rate of 25% would roughly achieve this with the current dividend marginal rate of 20% (25% + (.20 x .75) = 40%). Progressivity can be achieved (as it currently is) through progressive rates on the dividends/capital gains.
As someone who spent an entire professional career in the business, I find it amusing and naive that economists who lack any detailed knowledge of the Code or practical experience with its administration think it’s easy to radically “simplify the tax code”, make it “fair” to everyone, eliminate all tax avoidance, all at the same time! The three are simply not feasible simultaneously. As a wise man once said, “the life of the law has not been logic, but experience”.
The experience has also been that we need more than one type of tax in order to prevent the inevitable tax planning around one or the other. The system is complicated, but it is a result of a considerable amount of trial and error and political compromises. It can be made better, yes, but Trump’s promises are more credible than those who promise a one page tax code.
That is from Vivian Darkbloom. And from another Vivian comment:
1. “…so just tax that person”. Please explain how, absent a corporate income tax, the US is going to effectively tax foreign investors, if they invest via a US or foreign corporation. This is a major practical problem of eliminating the corporate income tax completely. It would be very difficult to get one’s ounce of tax flesh out of non-US investors and put them on equal footing with US investors (the same issue arises with a system relying solely on consumption tax). It would be very impractical to abrogate the 68 or so bilateral tax treaties the US is party to today or the treaties of friendship and commerce.
On the mark.
Is full expensing the right path for tax reform?
That is the topic of my latest Bloomberg column, here is one excerpt:
Since 2008, the federal government has extended “bonus expensing,” which allows for a 50 percent deduction for many investments and covers about two-thirds of all investment. There are already various expensing provisions for investing in equipment, advertising, and research and development, and many forms of accelerated depreciation. By one estimate, corporations in 2012 were able to deduct more than 87 percent of the value of their investments, over time. So moving to “full expensing” may not be a complete economic game changer.
If nothing else, full expensing would benefit businesses by accelerating when the relevant deductions could be taken (right away, rather than over a multiyear period), and for that reason it would boost investment. But that in turn benefits some kinds of businesses more than others. What about businesses that invest a lot today, but earn back the cash slowly and turn a profit only years later? Without a big tax bill, they won’t get a significant tax reduction now, which would blunt the benefits of full expensing. That’s OK, but again it means not to expect a miracle from tax reform.
And near the end:
But so often the devil is in the details, and the simple idea of applying economic logic to the tax code can be harder to pull off than it might seem at first.
Do read the whole thing.
Are American corporate profits really so high?
Notice that if a U.S. corporation earns a profit from affiliate operations abroad, the profit will be added to the numerator of CPATAX/GDP, but the costs will not be added to the denominator, as they should be in a “profit margin” analysis. Those costs, the compensation that the U.S. corporation pays to the entire foreign value-added chain–the workers, supervisors, suppliers, contractors, advertisers, and so on–are not part of U.S. GDP. They are a part of the GDP of other countries. Additionally, the profit that accrues to the U.S. corporation will not be added to the denominator, as it should be–again, it was not earned from operations inside the United States. In effect, nothing will be added to the denominator, even though profit was added to the numerator.
General Motors (GM) operates numerous plants in China. Suppose that one of these plants produces and sells one extra car. The profit will be added to CPATAX–a U.S. resident corporation, through its foreign affiliate, has earned money. But the wages and salaries paid to the workers and supervisors at the plant, and the compensation paid to the domestic suppliers, advertisers, contractors, and so on, will not be added to GDP, because the activities did not take place inside the United States. They took place in China, and therefore they belong to Chinese GDP. So, in effect, CPATAX/GDP will increase as if the sale entailed a 100% profit margin–actually, an infinite profit margin. Positive profit on a revenue of zero.
Here is much more, with many visuals and further details at the link, including a treatment of how to measure corporate profits accurately.
For the pointer, I thank @IronEconomist.
Jason Furman and Olivier Blanchard on the Border Adjustment Tax
Net revenues from border adjustment taxes and subsidies will be positive so long as the United States runs a trade deficit. But if foreign debt is not to explode, trade deficits must eventually be offset by trade surpluses in the future. Net revenues that are positive today will eventually have to turn negative. Indeed, any positive net revenues today must be offset by an equal discounted value of negative net revenues in the future.
Suppose that higher border adjustment revenues today are used to decrease other taxes—corporate tax cuts for example—leaving the budget unaffected in the short run. As trade deficits eventually turn into trade surpluses, and thus border adjustment net revenues turn from positive to negative, the other tax cuts it initially financed will still be on the books. Sooner or later, taxes will have to increase, or spending will have to be reduced, to compensate for the shortfall. Just as when the government issues debt, taxpayers get a break now, but they will have to pay off the cost of the debt in the future.
What if the exchange rate does not adjust fully? The story becomes more complicated, but the bottom line is the same. Depending on the demand and supply elasticities of imports and exports, the incidence of taxes will fall partly on US consumers, partly on foreigner producers; the incidence of subsidies will fall partly on US exporters, partly on foreign consumers. In fact, with incomplete exchange rate adjustment, it is plausible that in the short run US consumers will pay more than 100 percent of the net taxes raised—effectively financing a transfer to foreign producers as well. In any case, as trade deficits turn to surpluses, the roles will be inverted. What foreigners paid, they will get back. What US taxpayers received, they will have to give back. In the end, just as for debt finance, whatever tax breaks they got now, they will have to pay for later. On net, again, foreigners will not contribute.
Here is more of interest, self-recommending…
The taxation of superstars
Here is yet another NBER Working Paper to shout from the rooftops:
How are optimal taxes affected by the presence of superstar phenomena at the top of the earnings distribution? To answer this question, we extend the Mirrlees model to incorporate an assignment problem in the labor market that generates superstar effects. Perhaps surprisingly, rather than providing a rationale for higher taxes, we show that superstar effects provides a force for lower marginal taxes, conditional on the observed distribution of earnings. Superstar effects make the earnings schedule convex, which increases the responsiveness of individual earnings to tax changes. We show that various common elasticity measures are not sufficient statistics and must be adjusted upwards in optimal tax formulas. Finally, we study a comparative static that does not keep the observed earnings distribution fixed: when superstar technologies are introduced, inequality increases but we obtain a neutrality result, finding tax rates at the top unaltered.
That is from Florian Scheuer and Iván Werning.
Why have corporate profits been high?
Jeremy Siegel reports:
…David Bianco, chief equity strategist at Deutsche Bank, has shown that most of the margin expansion over the past 15 years has come from two factors: the increased proportion of foreign profits, which have higher margins because of lower corporate tax rates; and the increased weight of the technology sector in the S&P 500 index, a sector that usually carries the highest profit margins.
Higher profit margins also result from stronger balance sheets. The Federal Reserve reports that since 1996, the ratio of corporate liquid assets to short-term liabilities has nearly doubled, and the proportion of credit market debt that is long term has increased to almost 80 per cent from about 50 per cent. This means many companies have locked in the recent record low interest rates and will be much less sensitive to any future increase in rates, keeping margins high.
*Progressive Consumption Taxation*
The authors are Robert Carroll and Alan D. Viard and the subtitle is The X Tax Revisited, published by AEI. Here is a summary excerpt:
…we propose an X tax, consisting of a flat-rate firm-level tax on business cash flow and a graduated-rate household tax on wages. The tax would completely replace the individual and corporate income tax, the estate and gift taxes, and the Unearned Income Medicare Contribution tax slated to take effect in 2013.
Those interested in tax policy should read this book, which covers some of the tricky issues — such as the transition, or international income — more carefully than do most sources.
Dividends and taxation
President Obama wants to tax dividends at ordinary income rates. These results, from Marcus and Martin Jacob, should not come as a huge surprise:
We compile a comprehensive international dividend and capital gains tax data set to study tax explanations of corporate payouts for a panel of 6,416 firms from 25 countries for 1990-2008. We find robust evidence that the tax penalty on dividends versus capital gains is statistically significant and negatively related to firms’ propensity to pay dividends, initiate such payments, and the amount of dividends paid. Our analysis further reveals that an increase in the dividend tax penalty raises firms’ likelihood to repurchase shares, initiate such repurchases, and the amount of shares repurchased. This is strong confirming evidence that when listed industrial firms globally design their payout policies, they take into careful consideration the relative tax implications of their payout choices.
Here are some Finnish results:
Using register-based panel data covering all Finnish firms in 1999-2004, we examine how corporations anticipated the 2005 dividend tax increase via changes in their dividend and investment policies. The Finnish capital and corporate income tax reform of 2005 creates a useful opportunity to measure this behaviour, since it involves exogenous variation in the tax treatment of different types of firms. The estimation results reveal that those firms that anticipated a dividend tax hike increased their dividend payouts by 10-50 per cent. This increase was not accompanied by a reduction in investment activities, but rather was associated with increased indebtedness in non-listed firms. The results also suggest that the timing of dividend distributions probably offsets much of the potential for increased dividend tax revenue following the reform.
Here are more results from Finland. In the UK dividend tax increase of 1997 it seems pension funds were the marginal investor and they bore much of the burden from that particular reform.
The 57,000 Page Tax Return
The NYTimes reported earlier this year that through an extraordinary use of tax breaks and clever accounting:
[General Electric] reported worldwide profits of $14.2 billion, and said $5.1 billion of the total came from its operations in the United States. Its American tax bill? None. In fact, G.E. claimed a tax benefit of $3.2 billion.
The Times highlighted the skill of GE’s dream team:
G.E.’s giant tax department, led by a bow-tied former Treasury official named John Samuels, is often referred to as the world’s best tax law firm. Indeed, the company’s slogan “Imagination at Work” fits this department well. The team includes former officials not just from the Treasury, but also from the I.R.S. and virtually all the tax-writing committees in Congress.
More recently from The Weekly Standard we find what kind of effort it takes to pay no taxes on $14 billion in profits:
General Electric, one of the largest corporations in America, filed a whopping 57,000-page federal tax return earlier this year but didn’t pay taxes on $14 billion in profits. The return, which was filed electronically, would have been 19 feet high if printed out and stacked.
(FYI, the length of GE’s tax return has doubled since 2006 when it (first?) filed electronically at an equivalent of 24,000 pages.)
GE’s tax bill illustrates both why our corporate tax rate is too high and too low. The nominal rate is too high which encourages a real rate which is too low.
Consider the resources that GE spends to lowers its tax bill, not just the many millions spent on clever accounting and accountants and the many millions spent on lobbying but also the many inefficient ways that GE structures its businesses just to avoid paying taxes and the many millions it invests in socially wasteful projects just in order to produce privately valuable tax credits. Now add to that the allocational inefficiencies of taxing some firms at different rates than others and you have a corporate tax system which wastes a lot of resources and raises relatively little revenue. Indeed, a corporate tax system with a tax rate of zero could well be preferable as it would waste fewer resources and raise not much less revenue.
Hat tip: TaxProf blog.
*The Unincorporated Man* and slavery
As long as we are on the topic of slavery, why not consider fiction? This science fiction novel has an intriguing economic premise: you're born a slave and you're not free until you can buy yourself back from your owner (which may be a corporation).
It may sound funny to think that a slave can save money but arguably an optimal slavery contract in a high-productivity society will give the slave some residual claimancy and some property rights, in order to spur work effort.
At some point you wonder whether a slave in this futuristic society is better off buying the rights to himself or herself. (Then he has to find individual health insurance!) If the system of slavery is truly secure, it's like living under Laffer Curve-maximizing taxation. That's oppressive, but many people have lived under worse. There would be lots of "Nudge" as well and with advanced technology very effective monitoring and control.
Is it possible that in such a world you would trust only a person who was a slave?
In many historical instances, slaves cannot precommit to "no revolt." So slaves aren't allowed to earn at the Laffer maximum point, for fear they will rebel or otherwise receive or lobby for greater rights. Real world slavery is much much worse than this hypothetical portrait might make it seem.
I won't have time to read through the novel (the new Alice Munro is out, for one thing) but I thought the premise was an intriguing one. The Amazon reader reviews are favorable.
Henry Paulson defends the dividend tax cut
Here is the closest I find to a formal economic argument from the man. In this WSJ Op-Ed, if my eyes catch the fine print correctly, Paulson argued that the Bush dividend tax cuts will add 5 to 20 percent value to the stock market. (Here is my source, though I cannot find a permalink. And here is my source’s critique of the idea, although on this screen my old eyes cannot read it.)
I’ve never understood the Paulson argument for two reasons. First, at least in theory paying dividends should lower the value of the firm, relative to capital gains, given the higher dividend tax rate at the time. Dividends would appear to shift around the form in which wealth is held, pulling it from one pocket to another, rather than increasing wealth. I am the first to admit the entire topic of why dividends are paid is poorly understood, but that uncertainty does not militate in favor of targeting dividends for early and primary tax cuts. I would sooner cut or abolish the corporate income tax, for instance.
Second, for any given level of government spending, the wealth effects of the dividend tax cut (if those effects exist in the first place) are a transfer to equity holders and from….? Well, that remains to be seen. Stay tuned for your forthcoming tax increase…Some of you, that is…
Addendum: I should make the broader point that this pick is probably very good news.