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What would lowering Corporate taxes do?
Giggles_Funsworth
Blight on DiscourseBay Area SprawlRegistered User regular
Blight on DiscourseBay Area SprawlRegistered User regular
I read a piece on a blog a RON PAUL friend linked the other day on Facebook. Don't remember offhand what it was, and it's not really worth linking, but it got the wheels turning a little bit and I know there's a lot of people on this forum that know a lot more about economic theory than me and I wanted to see what you all had to say about this.
Entirely possible there's something I've overlooked here and this is a really dumb idea, but if we were to lower Corporate taxes, drastically even, wouldn't it be good for attracting business to the US? This is something I'd heard Republicans and Randians bitch about before and I never gave it much thought, but this time I put it together with higher taxes in general, and especially fixing the tax code for the "1%", taxing capital gains properly, etc. The money the Corporations make has to go somewhere, be it Executive salaries or further growth or WHATEVER, and if we taxed individuals more, while taxing Corporations less, wouldn't it make it easier for them to do business without necessarily crippling tax revenue, and possibly even spread the pain a little more fairly with a progressive tax code?
Thoughts? This has been nagging me for a few days now and I haven't been able to see a flaw with this on my own.
Entirely possible there's something I've overlooked here and this is a really dumb idea, but if we were to lower Corporate taxes, drastically even, wouldn't it be good for attracting business to the US? This is something I'd heard Republicans and Randians bitch about before and I never gave it much thought, but this time I put it together with higher taxes in general, and especially fixing the tax code for the "1%", taxing capital gains properly, etc. The money the Corporations make has to go somewhere, be it Executive salaries or further growth or WHATEVER, and if we taxed individuals more, while taxing Corporations less, wouldn't it make it easier for them to do business without necessarily crippling tax revenue, and possibly even spread the pain a little more fairly with a progressive tax code?
Thoughts? This has been nagging me for a few days now and I haven't been able to see a flaw with this on my own.
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Create more jobs in China and India.
The most immediate effect would probably be padding the bottom line so that the executives could raid it because they have so much cash (they must be doing an awesome job!) But there might be some investment in plant and property, or even in other companies or their employees. And the tax burden on corporations isn't crippling or making it so the ones that make the most profit can't make even more the next year...
But its not like they'd hire more people because they have more money. They'd only higher more people if there was more demand.
The developed world tried to function as a service-based economy, and it worked great for a while, but such models are only sustainable with substantial regulatory intervention, which Hayek-fans also reject outright. But look at what's happened over the last thirty years; growth, growth, growth, until the crash, and we finally see in stark terms that there was little real growth, just a massive transfer of wealth from upper-working-class through centre-middle-class to the most well-off. And what happened over those thirty years? A steady trend of deregulation, tax cuts or the creation of new loopholes for the wealthiest to exploit, and the steady withering of the economic-left in the face of what turned out to be a completely fictional period of growth and prosperity.
No doubt at this point some spluttering neo-liberal will be along to brand me a rabid socialist(bitch please; my political views are so heterodox that I've passed through "hipster" and come all the way back around :P), but any honest examination of the facts leads to an inevitable conclusion; neo-liberalism has failed. It failed from the moment it was implemented, those who were benefiting from it simply hid that fact from most people until the whole edifice collapsed under its own weight in 2006-8, and it continues to fail today in its new guise of "deficit reduction" or "austerity economics".
But that won't stop Hayek-fans, because they don't see the economy as a tool to improve the lives of the citizenry, they see it as a god that we must worship and offer-up sacrifices to in the hopes that it will bless us with good fortune; they are the modern-day equivalent of shamen burying skulls filled with shit and herbs in the fields, so that Gumbomumbo Lord of Fertility will grant a bountiful harvest.
an interesting study
If I remember correctly, the the way taxing works, you pay one percentage of the first $50,000 and then another percentage on next $100k or so (the amount is probably off) I'd like to think that these are the people we all have in mind and are looking out for, but that doesn't ever seem to be the way it ends up.
The breakdown on cost for compliance with federal regulation is pretty telling though. It can make or break a business with ~20 employees, but costs less when you have more people...
Is this true? I don't know.
I strongly believe that having an intertwined global economy will gradually sort this out. China is already starting to find it more beneficial to manufacture products for Chinese markets instead of shipping them overseas, and manufactured goods for Western markets is starting to shift to Southeast Asia. Eventually you run out of developing nations to manufacture in that are stable enough to set up shop there.
I also failed to mention it in the original post, but I am assuming that in addition to lowering the tax rates you would close the loopholes and end bullshit like GE paying little to no tax by getting all lawyered. That shit is ridiculous.
I am not sure I understand what you mean by convection. Like it does more than just sit in place, it goes and does other things too? I know they certainly spend it on more expensive things in addition to investments.
True story, the other day I was complaining about having to pay taxes for the first time even though I'd had my company withhold my income tax the entire year on Facebook. First response was from a friend's mom, went "Welcome to the adult world, be thankful its not 35%!" and I gotta say I was pretty flabbergasted. Even if I didn't receive any deductions at all, if I was being taxed at that level, after tax I would have roughly six times my current gross. I told her I'd be pretty okay with that as I'd be earning more than I ever expected to in my life, but it was a pretty huge eye opener as to how far removed the wealthy are from the mindset of us peons.
Your referring to sales tax right? Cause investing buying equipment would be categorized as an expense, and would lower your tax base. As far as investing in another company, what taxes are involved in doing that?
Corporate taxes are already low, and corporations are already sitting on VAST stockpiles of cash (the succesful ones, who are actually paying 'lots' of tax. Remember there is only tax on profits) Companies should be investing massively in infrastructure, but have (in my opinion at least) realized that if the economy is TOO succesful that it has some short term losses for them since it means they have to pay people more. As such they are twiddling their thumbs wondering what to do with their cash that will benefit them without benefitting their workers too much. The answer for a lot of them has been big payouts to executives and shipping the money overseas to china and india.
So, no, we don't want lower corporate tax rates. What we want is to remove fixed barriers to entry (healthcare costs, constant licensing costs, patent costs etc) that prevent competition entering the market and strengthen the teeth of our anti-monopoly laws significantly. That way there is more chance for new businesses to enter the fray, which will lead to investment, better services to customers and more jobs.
Big business can be good, but ONLY in an environment where they are forced to play fair. In current business culture the massive giants can crush the little guys at a whim.
I'm probably confusing a lot of things, but don't companies have to figure out and then pay tax on goodwill after they finish writing it off?
Ultimately, though, by eliminating taxes, we'd only be eliminating government, rather than changing the structure of the economy. But like tbloxham says, taxes are not a barrier because every company pays them. Well, should pay them. Taxes cover infrastructure that not every company directly supports, like unemployment, infrastructure, and more. Most companies don't pay much attention to the fact that the taxes they pay go towards the roads to access their facility, the power grid that supports their electricity, etc. They just see taxes as something they have to pay, and think "imagine the things we could do if we didn't have to pay that."
The "simple" answer is that in terms of pure "efficiency", it makes sense to not tax corporations and instead tax people. But the reason for this has nothing to do with job creation, attracting businesses to the United States, or Growth Rates.
The complex answer basically says that corporations end up being pass through entities with regards to taxes because they largely operate in competitive markets. Every unit of tax levied upon them increases the raw amount of profit required to meet their economic zero profit conditions. I.E. If you tax a corporation 10% and they made $5m before the tax, in order to have the same amount of money to pay their cost of capital, they would need 5.5m.
How do you get the extra .5m? You raise prices, and since everyone is raising prices (because the tax is on everyone) people don't substitute away from your good. The supporting logic for this basically says "If companies could increase their profits by reducing their costs after the taxes were implemented they could increase their profits by reducing their costs before the taxes were implemented so why didn't they reduce their prices then?"
This still is consistent with corporations desperately trying to reduce their tax burden, because a lower tax burden is a marginal cost advantage over your competitor, which means you can reduce prices to increase your profit. But largely the effect is still seen in prices that the consumer pays.
And if the consumer is going to pay the taxes why not just have it be a consumption tax? Well there isn't really a good reason, except that it may be politically easier to support a corporate rather than consumption tax(or income tax or capital tax or whathaveyou) and underfunding the govt is probably worse than funding it in an inefficient way by having the wrong mix of taxes. [Note: Even if the right mix of taxes are consumption taxes, if we expect corporations to spend more effort dodging corporate rather than consumption taxes we get less wasted activity, but it might not be the case that it is so]
Now, this doesn't answer the question of "will companies come to the United States" and the answer there is "maybe. But probably not". The problem with answering such a question is that it often ignores what other nations do. If we lower our corporate taxes do other nations follow suit? If us lowering taxes will take businesses from them and give them to us then yes, we expect us lowering taxes will cause them to lower taxes in response. And we expect them to do so until, roughly, the same amount of business is left in each area.
To give an example of this, we can look to corporate behavior. Back in the day there was a price war between Pepsi and Coke over the price of 2litre soda bottles. It was so fierce that at some point the price of the 2 litre was lower than the individual cans (actually might be true again now). This is basically because the entirety of the expense of soda is in the bottling, and cans are much more expensive than 2litre plastic bottles. Anyway, Pepsi and Coke were competing on price and were constantly lowering the price of their 2litre soda in an attempt to gain profit by stealing market share. And it worked at the margin, if they were charging $2 you could charge $1.90 and make more money. Until they responded and reduced their price to $1.90. Because the market for soda was more or less fixed, each time this happened they lost money compared to just selling at the higher price. Eventually when prices were very low one of the companies just said "screw it" and posted a high price until the other followed suit and both were back to making a lot of money on 2litre soda.
Nations competing for businesses aren't any different, they have various amounts of social advantages to which the tax rate can be figured into after which businesses decide where they're going to locate and operate. Tax rate changes will cause some firms to move if no one else changes their tax rates in response. But if they do(and they're likely to) then the net effect is expected to be zero. Lowering corporate taxes probably doesn't change the amount of businesses in the United States it just increases
Now you might say "wait a second, that view that companies will actually relocate at all hinges on the first idea being false because moving to an area with a lower tax burden does not create a competitive advantage because all the firms already there have that same tax rate" and that may be true (it could also be the case that businesses are not that good at making these kinds of decisions, but that could also throw off the other metrics and I am not familiar enough with the literature in this area to give a confident answer)
So that leads us to ask "what if the market isn't more or less fixed" to get to the last part of the evaluation and the short answer is that "the market is more or less fixed" at least its fixed in the sense that we can't find ways to show that taxes reduce growth and we can't find ways to say that one tax over another makes people worse off. (Note: So long as our models are reasonable with regards to the effect of government spending and personal budget conditions, bad assumptions can certainly make it look like this effect appears)
edit: So the long answer is a big long "maybe" with a huge side helping of "it depends on what you believe about who should pay taxes, and how effectively we can make them pay taxes"
It's not entirely true. Buying stocks doesn't mean cash has entered into the pocket of the business. Putting money in the hands of an investment firm doesn't mean that investment firm is doing anything outside of buying Treasuries with that money.
While the extremely wealth are not hoarding money, they also aren't making it available to other people, either directly or through their investment advisers.
I'm not sure about Goodwill. You only gain goodwill when you buy a business and pay more for it than it's book value. I don't see how you would end up paying taxes on that. Isn't it amortized as an expense over the period that it's useful?
A common refrain from the GOP these days is that lowering corporate taxes and lowing capital gains taxes will in turn boost employment and economic recovery because corporations will have more money to sink into new hires, new projects, and growth. This is analogous to someone saying that if you give more money to a morbidly obese person with a food addiction, they will now buy healthier food.
Simple rule of Economics 101: Corporate income does not drive hiring practices; corporate income (or a dearth of it) can only limit hiring practices. A corporation will always seek peak efficiency, using a formula that will seek to maximize profits for the barest minimum allowable production. Cost of resources being equal, if you can sell 100 widgets for 10 dollars or 1000 widgets for 1 dollar, you will sell the 100 widgets because it takes fewer resources (material, employees, logistics) to do so and you have a better chance of maximizing your net potential income.
Some important facts:
- Income disparity between labor and executives has never been greater. Executives have more cash on-hand than ever before in our lifetimes.
- Corporate profits have never been higher, even adjusting for inflation. Companies have more wherewithal now to invest, grow, and hire than they ever have in our lifetimes.
- US corporate tax rates, while still one of the highest in the developed world, have (again) never been lower in our lifetime. Likewise, the proportion of total corporate tax revenues as part of the GPD has never been lower.
Simple rule of Economics 102: Employment demand is a product of output demand. Right now we're in a period of significantly reduced demand, and much of what is in demand (manufacturing, raw materials, textiles) cannot be produced in the US for what we're paying for it to come from overseas. It just can't. What will decreasing corporate taxes do at this point? Well, for starters, it'll give more money to the corporations, which they like. Then, because of economies of scale, local and smaller-sized competition will dry up because the mega-corporations can flood the market with goods at prices that cannot be reasonably competed against. In effect, the US will be out of the manufacturing game for good, with only few exceptions (domestic cars, domestic energy). But will this in any way increase employment?
No.
It won't touch employment because demand isn't going up. Demand drives growth and production. Growth and production drive employment. But why isn't demand going up? For starters, 90% of all US laborers haven't seen a significant growth in their income. Adjusted for inflation since 1995, the US worker in the lower 90% has seen a 15% growth in his disposable income, but the cost of goods has increased around 65%. Cost inflation is outpacing monetary inflation by a wide margin. This benefits the corporations, since they're making more money per product than they once did, but it fucks over the consumer by decreasing the elasticity of his dollar. And this is what brings employment down; if a company can charge $4 for a widget they used to sell for $2.75 and meet the same level of revenue, this benefits them because it decreases their operating costs when they sell less product for more money.
Simply: "More products for more money" is good. "Less product for more money" is better. "More product for same money" is bad. "More product for less money" is worst. Three of these four scenarios imply growth of employment, but for two of those three, it's a bad thing.
Simple rule of Economics 201: Employment is a function of demand, which is increased by decreasing market prices or new market entries. If you decrease market prices, corporations are going to seek higher efficiency of production costs, and that means cutting labor. The only way to maintain high levels of output and avoid cutting labor is growth of your model and consistent innovation, and those factors are predicated on market competition, which we don't really have in the US because we buy all of our shit overseas.
In short, we're kind of fucked, but giving the corporations more money isn't going to un-fuck us. It will fuck us much worse.
Yes most rich people actually invest their money. How this creates jobs, no one every actually explains. There's a reason Bush I called it voodoo economics.
Cut taxes on the Rich-->they invest more--->*VooDoo*-->more jobs for everyone.
Case in point during last years partial-FAA shutdown the government couldn't charge airlines about 200 million in taxes. ticket prices didn't go down at all in fact the airlines used the shutdown as an excuse to raise prices
As Futurama well put it, "Banks are where poor people keep their money that isn't prudently invested"
Right. That's an argument for providing special tax incentives for new investments or corporate projects, not across-the-board slashing of taxes.
That's like telling your mom you need new shoes but the store only accepts blank checks.
This is a good point, and maybe I can dredge some of my old slides up later to support myself better, but as the size of an interest group rises past a certain point, generally its effectiveness decreases due to the costs of coordination and competing interests. So we can usually expect that a series of corporations will be more effective at lobbying for tax code changes than a group of consumers since they are (generally) more focused. In other words, Solar Panel manufacturers will find it easier to reduce their marginal tax rate compared to People Who Get Child Care Credits. In other words, I think corporate lobbying is far more corrosive than lobbying by citizens as it is far more likely to carve out exemptions that may not be in societies interest.
I also think there is reason to believe that the effeciency loss incurred by tax avoidance efforts would be less if corporate tax rates were lowered and the slack made up elsewhere.
There are other problems with the US corporate tax code though. For one it is only paid by C-corps, which gives an incentive not to organize as a c-corp. Given that c-corps currently face the most transparency requirements (I think, this is off the top of my head), that might be a bad thing. As currently structured it also incentives the use of debt financing over equity.
Personally, I'd rather remove the corporate tax entirely, raise capital gains rates and make the current income tax more progressive. But that isn't likely to ever happen.
Could we implement something akin to the UK's Ramsay Principle in the US?
Would it stop the Double Irish and other creative tax-evasive structures?
What would be the drawback?
the "no true scotch man" fallacy.
I was not talking about lobbying to reduce taxes. Lobbying to reduce taxes is just an example of businesses being stupid. If taxes are reduced they are reduced on everyone and no one gets an advantage.
I was talking about the ability to use loopholes. Corporations even more so than wealthy individuals can (and do) devote significant effort to reduce their tax burden.
We could say "oh just eliminate loopholes" but that is not nearly so easy done as said as we have discussed here many times before.
So with the FAA shutdown we had reason to believe prices would not change due to both speed of adjustment issues and lack of competition in the airline industry (largely due to the hub system) and since the taxation was not marginal (iirc).
But that is not the way it works for the majority of businesses. Maximizing profits is not about finding a pricepoint people are willing to pay, but finding a pricepoint people are willing to pay wherein competitors cannot offer a lower price point.
The other obvious for this is that if businesses are maximizing profit in the way you suggest they are entirely insensitive to input prices of all types. But we would be foolish to suggest that the price of food and clothing and well, pretty much everything you buy, doesn't change when those base goods become more expensive.
I am not entirely up on the ways in which we model this (anymore), but we do have pretty good frameworks that explain how we can see how and where input good price changes will be absorbed. Well, corporate taxes work just like input good price changes, except they are on the input good of capital. Now you have to pay more (record more total profit) in order to maintain the same level of capital (because your cost of capital did not change)
Revenue taxes have all the problems of corporate taxes, but magnified, they generally aren't a good idea.
For a real life example, Ireland has a super low tax rate and the EU responds by trying to stab them in the face until they die.
And people forget that gov't spending creates "convection" as you say, since if they build a bunch of bridges or pay gov't employees or Medicare payments, that money's getting plowed right back into the economy. And if creating that activity is your goal, putting a bit more money inti the hands of poor people gets you more bang for your buck, since they go out and spend it, creating demand, whereas the wealthy and superwealthy can either stash the money somewhere or invest it in a foreign country; there's no guarantee it gets plowed back into the domestic economy, as is the goal when trying to stimulate the economy.
The problem with your theory about an intertwined global economy is that we will have decades-to-centuries to go to get rid of developing countries; in the meantime, these rich-as-hell companies will do everythign in their power to stop that from happening. Sure, if you could cut every single loophole in tax code, immediately develop every country, and cut corporate taxes all @ once, you'd be onto something.
The "Cut Corporate Taxes for Great Justice" crap isn't going to do all three of those things though... just the one that makes more money for the rich while doing everything it can to hold the lower-classes in place.
TylerJ on League of Legends (it's free and fun!)
I think it also adds to money elasticity and possibly money radiation.
Wait, whut?
Nevermind, say I'm rich, I made my money being a ditch-digger, but I made a lot of it because I worked really hard and saved it all. That money was gained by and represents the work I did, the production (of ditches) that people had a use for.
Then say I stick that money in an investment. That money can go off and be used to build a new factory or a new venture or hiring more ditch-diggers, whatever. That money flows, but it can't flow forever, because it is still tied to me. No matter how far that investment goes, unless the thing I invested in defaults, it still elastically stretches all the way back to me. That money represents the work I *did* but is not further work, it is not further production of goods or services, it is simply a static THING representing the work done. It's kind of like a debt that society owes me for digging all those ditches.
This is (one of several) problem with the idea that investments generate wealth. Even if we assume wealth can be created (a philosophical presumption) it is owned by the investor, who is almost always one of the super-rich, making investments or holding money in bank accounts.
Further, if the things I put money in are not successful based on some criteria I set, I withdraw the money. As you say, it's still "mine," I'm just lending it to someone to do good things with. I expect it back with interest paid.
So you dig some ditches for money and invest in a company. A ditch-digging company that hires people to dig ditches. Is the money still "tied" to you and "representing" your ditches, or is it now tied to those other ditch-diggers and their ditches?
Investment encourages and enables more productive uses of labor and resources. And wealth being created isn't a "philosophical presumption". Wealth is a defined term that can be measured. If you would like to make a philosophical point that aggregate wealth should not be valued so highly, either by individuals or collectively, you're free to do so, of course.