Results for “corporate tax” 239 found
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.
Cutting corporate rates vs. boosting the EITC
If the federal government boosts the Earned Income Tax Credit, or for that matter just lowers tax rates on lower-income workers, firms have an incentive to hire more labor (and also an incentive to expand hours for individual workers). Those effects are large, for a fixed EITC boost, to the extent the demand for labor is elastic.
Note that if EITC boosts only labor demand, without the scale of business expanding as well, the marginal product of labor will fall somewhat, undoing some of the beneficial net wage effects. On the other hand, if the scale of business expands, some of the benefit is reaped by capital and natural resource owners as well.
OK, now say we cut corporate tax rates. Companies do more of…something, maybe we’re not quite sure what. Labor is targeted less directly, though in “simple stupid” theory we treat labor as the main marginal cost. So if corporate rates don’t have a large impact on activity overall, they might have a disproportionate impact on labor demand within the changes that do happen. For instance, if plant size stays the same, you hire more labor to distribute more product.
As with EITC, to the extent the elasticity of demand for labor is small, the quantity of labor hired won’t go up much, nor will wages.
Maybe a corporate rate cut will induce an increase in overall scale and activity, and thus the hiring of more capital and resources, in addition to labor. That may mean a smaller immediate boost to labor returns, but in the longer run labor is combined with more capital and resources and thus may maintain a higher marginal product.
EITC does have the advantage of being more directly targeted to labor. But in the world-states where that targeting matters, labor ends up surrounded by not enough capital. Cutting the corporate tax rate is more likely to favor scenarios where the demand for labor goes up, capital thickens around labor, and labor remains relatively non-commoditized. This may go especially well for workers when there are increasing returns to scale.
The economics of these cases are fairly similar, albeit with the afore-mentioned difference in terms of targeting. That difference may or may not favor EITC. In any case, for me it is strange if people favor an EITC boost but are skeptical about cuts in the corporate rate. Both require an elastic demand for labor, if they are to be effective in raising wages.
Egalitarians tend to think the more “naked,” targeted subsidy to labor will be more effective than removing disincentives to production, but that doesn’t really follow.
Note also that cutting corporate probably lowers avoidance/fraud, whereas boosting the EITC would increase tax fraud.
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…
Scott Sumner has some questions on the border tax adjustment
Martin Feldstein had a recent piece in the WSJ that defended the idea of a border tax adjustment, which would be a part of the proposed corporate tax reform. He points out that if imports were no longer deductible, and exports received a subsidy, then the border adjustment would not distort trade. Rather the effect would be exactly offset by a 25% appreciation of the dollar. I certainly understand that this would be true of a perfect across-the-board border tax system. But is that what we will have?
1. Will the subsidy apply to service exports? (Recall that services are a huge strength of the US trade sector.) Let’s take Disney World, which makes lots of money exporting services to European, Canadian, Asian and Latin American tourists visiting Orlando. Exactly how will Disney determine the amount of export subsidy it gets? Do they ask each tourist what country they are from, every time they buy a Coke? That seems far fetched—what am I missing? If Disney doesn’t get the export subsidy, then the 25% dollar appreciation would hammer them, and indeed the entire US service export sector.
2. What about all those corporate earnings that are supposed to be repatriated? (And future earnings as well.) If the dollar appreciates by 25%, then doesn’t this hurt multinationals? Or am I missing something?
Update: It just occurred to me that corporate cash stuffed overseas is probably held in dollars. But future overseas earnings may still be in local currency.
Keep in mind that the prediction of 25% dollar appreciation is from the supporters of the plan, like Martin Feldstein. If you did this sort of adjustment without any dollar appreciation, the impact would be devastating on companies like Walmart. Given the Fed’s 2% inflation target, how could they pass along a (effective) 25% tariff on almost everything they sell?
There are other points of value at the link. I agree with Scott’s most general claim that the case for this tax has not yet been made.
Larry Summers on the new Republican tax plan
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).
Amazon employment and the tax wedge
A few points on the Amazon story everyone is talking about:
1. First, if the story is somewhat true but exaggerated (a plausible scenario for something anecdotally based), the story may help Amazon with its current (but not prospective) employees. A lot of people suddenly are feeling better treated than the perceived average, and that may boost their morale and productivity. Yet they still feel the surrounding pressures to succeed. As a countervailing force, Amazon is now less of a high status place to work and that may lower productivity and also it may hurt recruiting.
2. Given the existence of a tax wedge, Amazon employees are perhaps treated better than they would be in an optimum. There is in general an inefficient substitution into non-pecuniary means of reimbursing workers because workplace income is taxed but workplace perks are not. So arguably Amazon is treating its workers too well. Think of this as another form of corporate tax arbitrage.
3. There is no right to an upper middle class lifestyle. And for a large number of people, getting one is not easy.
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.
The battle at the margin is about wealth taxes and families
President Barack Obama will propose raising $238bn by levying a one-off tax on the cash piles held by US companies overseas to repair the US’s crumbling roads and bridges.
The measure, a key plank of the president’s budget to be outlined on Monday, would impose a 14 per cent “transition” tax on the estimated $2tn in earnings US companies have amassed overseas, the White House said on Sunday.
The FT story is here, Vox is here. Part of the plan also involves replacing the 35 percent rate — which many large corporations avoid — with a 19 percent flat rate which would apply to foreign earnings as well.
And what might these taxes eventually go to pay for? Matt Yglesias reports:
…there’s an emerging Democratic consensus over what’s next — children and family policy. There are a few different threads to this, including early childhood education, special tax benefits for working moms, child care subsidies, and paid sick leave and maternity leave.
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.