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Home Publications Blogs Beat the Press More Cheap Thoughts on the Corporate Income Tax

More Cheap Thoughts on the Corporate Income Tax

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Friday, 29 August 2014 15:17

The exchange I had with Jared Bernstein and subsequent comments by others have led to me do more thinking on the corporate income tax. First, just to respond to various notes and comments, I was not all upset that Jared and I disagreed. Jared is an old friend and a very good economist. I value his views, which is why I write books with him. I learned from his comments and I appreciate his concern for losing revenue even if it doesn't over-ride my my reasons for thinking that eliminating the corporate income tax (CIT) is a good idea.

I think the most useful way to think of the CIT is an optional levy placed on corporate income. We tell corporations that they have to pay 35 percent of their income in taxes to the government. It's optional in the sense that we allow them to cut this amount by two-thirds, if they instead pay one-third of this levy to Wall Street investment banks, accounting firms, and tax lawyers. (Using 2014 numbers  nominal corporate tax liability would be roughly 6 percent of GDP or $1,050 billion, with actual tax collections around 2.0 percent of GDP or $350 billion.) This is roughly how the tax boils down, with the Government Accountability Office estimating that companies pay about 13.0 percent of their income in taxes to the government, compared to the 35 percent nominal tax rate. This means that 22 percentage points of the profits, that in principle are owed as taxes, are escaping taxation by the government.

In fairness, I don't know how much corporate America is actually paying to escape its taxes. (Someone have a good study to send me?) Essentially, I am just assuming that they spend half of their tax savings on avoidance costs. 

These avoidance costs have real economic consequences. We are paying people lots of money to do activities that have zero value to the economy even though they are hugely valuable to their corporate employers. The people working on tax scams at the major accounting firms, or working out inversion mergers at Goldman Sachs, or creating new tax shelters at private equity companies could all be employed doing something productive. This is like giving companies a tax credit to pay people to dig holes and fill them up again. The difference is that these are highly educated people and they are getting paid really big bucks for the pointless hole-digging.

 

If we snapped our fingers and just shutdown the CIT avoidance industry tomorrow, these people would have to get real jobs. Think of the Republican rhetoric about laying off government bureaucrats and forcing them to get real jobs in the private sector. While that line is overwhelmingly nonsense (the vast majority of government employees are doing real work), in this case it is completely accurate since people employed in avoiding the CIT are doing nothing of value for the economy. This means we will have freed up somewhere around $350 billion in real resources to do productive tasks in the economy. (Yes, I know we are facing stagnation so these workers could just end up unemployed. That would be true in today's economy, but if we imagine that at some point in the future we will be close to full employment then it would be an enormous boost to the economy to have these people doing productive work rather than gaming the tax code. And, if we are below full employment we don't really need the taxes anyhow.)

The question that many people raised, including Jared, is why wouldn't a comparable tax avoidance industry arise on the individual side of the economy, especially if we were raising taxes by almost enough to cover the lost revenue? There are two points on this one. First, as a theoretical matter, there are large costs to tax avoidance. It makes sense for a big company to spend $5 billion to save $10 billion in tax liability.

However if we dished out that $10 billion as $10,000 for one million people, it is likely that it would cost each of them much more than $5,000 to find a tax scam to save them this amount of money. In fact, it is likely to cost them much more than $10,000 each. There are big economies in scale in tax avoidance. This means that we would not see anywhere near as much of a tax avoidance industry on the individual side growing up to replace the one we killed on the corporate side.

In fact, we have a pretty good way to assess the size of the tax avoidance industry this would create. We would be increasing personal income tax revenue by roughly 25 percent. As a first approximation it would be reasonable to assume that the tax avoidance industry on the personal income tax side would also increase by 25 percent. I haven't seen any studies on this, but my guess is this increase would be tiny compared to the CIT avoidance industry that we just killed.

Anyhow, if we can pull this one off politically, I don't see anyway around the fact that the potential gains are enormous. It makes no sense to have a government program that gives hundreds of billions of dollars to many of the richest people in the country to do nothing. That is effectively what we are doing with the current CIT. No one should be deluded into thinking this doesn't have a real cost to the rest of us just because it is not a line item in the budget.

One final item, I know this is a political non-starter right now not only with the Republicans but probably also with many Dems. I know who gives them campaign contributions. But that shouldn't keep us from thinking what a better system might look like and then think about how we can get from here to there.

 

 Note: Share of profits esacping taxation has been clarified. Thanks to Robert Salzberg.

 

Comments (19)Add Comment
How do you get there from here
written by Rich, August 29, 2014 5:13
I can see D's supporting this if at the same time we change tax laws on all capital gains to be counted as income, and all of that income be taxed fully on FICA/Medicare/etc. No caps, and tax exempt the first $25k of income for all taxpayers + any children. And eliminate the debt ceiling rule.
The political aspect
written by Benjamin Levy, August 29, 2014 5:53
I could see half of the Republicans supporting this (the pro-business side, think Mitt Romney - and yes, I know he loves cheating taxes). And perhaps the D's if we be smart and raise some taxes to make up for it (capital gains, etc.).

It's a long shot, but possible, if the President was on board.
I can think of 2 problems
written by Dave, August 29, 2014 7:06
Briefly, I have though of 2 problems. I don't know how bad the first would be, but the second would be awful, I think.

1) I could easily see our system moving towards corporatizing of the individual. That is to say, individuals might prefer to be independent contractors declared as corporations. This way they can avoid SS taxes on revenue put to expenses like vehicles, temporary housing, and other expenses.

2) Corporations can use their money on politics. This could potentially inject a lot more money into the political system.

Other than that, I'll wait to see if people can come up with good ways to get there. I can't help but believe this is like waving a white flag to the multinationals. I don't like that.

Corporations are the biggest savers
written by Doug Rife, August 29, 2014 8:35
Secular stagnation is state in which there is an excess of savings over consumption plus investment, even when interest rates are zero. A big reason for the savings glut are corporations and they are the biggest savers because doing so allows them to avoid paying taxes. For example, multinationals keep their profits overseas rather than repatriating them to pay dividends or make domestic investments that would create more domestic jobs. Keeping them overseas shelters them from the US CIT. The fact is corporations are the biggest hoarders of cash in the whole economy. Without a CIT there would no longer be tax incentives to hoard profits and this would result in more spending and less saving by corporations.

Better yet would be to tax retained profits each year they are held at a rate of say 10% per year. That would be a tax applied over and over to the same profits each year they are not distributed to shareholders or invested in plant and equipment. Buybacks and buying shares in other companies would not qualify as investments. That way, profits would become hot potatoes that corporations would want to get rid of as soon as possible which could counter their demand depressing tendency to hoard profits or rely on financial engineering to boost their stock price.

The 10% tax would better be called a penalty rather than a tax because as long as profits are disposed of by the end of each fiscal year and none are carried over to the next fiscal year there would be zero tax due.

Of course, this plan also presumes taxing dividends and capital gains of the shareholders at ordinary income tax rates.
....
written by djb, August 29, 2014 9:47
raise the individual tax rate first, then when you got that going then maybe get rid of corporate tax

or increase one by decreasing the other in increments
1/3 to investment Banks
written by JayR, August 29, 2014 9:50
1/3 cost for tax avoidance? Were is Dean getting that from? For instance in the Burger King deal there is billions but the deal is one time and then Burger King avoids taxes for years. I would think setting up a tax avoidance structure is a one time cost but the savings would be yearly. That number just seems way too high by possible an order of magnitude or more. Why would you want be if favour of some change unless you know more about what the change is actually going to be?
Why Rich Republicans Love the IRS and the Corporate Income Tax
written by Last Mover, August 30, 2014 5:02

Corporations and the tax avoidance industry exploit and rip off Americans for literally trillions of dollars per year. For starters look at one result, the disgraceful state of infrastructure compared to other developed nations.

For proof of intent, look at one fringe group of the crazies, conservatives who want to abolish the IRS. Mainstream Republicans have no intention of abolishing the IRS yet tolerate the crazies to keep the donations flowing in from the brainwashed masses.

The upper class of the conservative political base loves the impenetrable tangle of tax loophole laws that make up the IRS. They designed it that way as part of their livelihood based on an economic predatory lifestyle.

When they hear cries to abolish the IRS - or eliminate the corporate income tax per Dean Baker for that matter - it gets at best a repressed, muted, cool response cloaked in the usual posture of staying a course grounded in stability and pragmatism.

No need to destroy the village to save it with a crazy scorched earth overhaul is there, they will say. Just do some more selective surgical work on taxes to make the corporate predators even better off so they can, you know, create more jobs add more growth to the economy. LOL.

It makes sense. Keep paying the crazies to show up periodically on Fox News and remind everyone with screaming rants how terrible and repressive the tax code is. Just don't let the sock puppets get too close to the bread and butter sacred cow of their owners, the real economic predators behind the IRS tax code.
I wish I lived in that world.
written by SM, August 30, 2014 5:07
No disagreement here, Dr. Baker is right in regards to the economics.

However, with regards to politics and the actual existing world, its just not a good idea.

As liberals, we aren't as concerned with the means as we are the end. We want a country that provides X Y and Z, and we have to pay for it somehow, or X Y and Z go away. We prefer if collecting money to pay for X Y and Z doesn't cause other issues - for example, making the middle class pay for everything is bad.

When it came to obamacare, our choice wasn't between that travesty of legislation and single payer. Our choice was obamacare or nothing. So we took obamacare.

And when it comes to tax reform, our choice isn't between a convoluted system and a clean system. It's between a convoluted system, and our future convoluted system but with no CIT and consequently A) deficits which we will be beaten over the head with at every election, or B) cuts to actual programs that actually help people.

We've been down this road before. We "simplified" the tax code back in 86. And what are we having a discussion about now? Oh, that's right, the same thing. Because all the "crap" came back.

The problem is two-fold: one, the way the system is set up, it is biased against progress. It takes 60 votes for progress, and only 50+VP to chop away. Once we cut the rate (to zero!) it won't be back. We will have to make due - and even if we get the other rates raised in the compromise, they'll be hacked away in no time. (I still remember the early 00's - anyone else remember Greenspan telling us we're paying off our debt too fast?) Second, all the "crap" will be back in no time. Lobbyists will be paying the politicians as usual, loopholes in other tax rates will appear, etc, etc, etc. But we'll never get the rate (or taxes) back. It will be gone forever.

Not only that, but when ALEC gets done writing the bill, I'm sure there will be so many loopholes that we might as well just save ourselves the time and effort and give the 1% all our money.

Let the R's hack away, and get something permanent and significant in return. No reason for us to do it for them. But you'll quickly see that if we do anything that is actually revenue neutral - which means, "rich people make it up" - they'll never go for it. Our only chance would be to increase taxes on the middle class, which they are always happy to do. So, uh, no thank you.

Now, if we lived in a world run by liberals, get rid of it tomorrow.
factotum
written by xteeth, August 30, 2014 10:08
Sadly, the results of eliminating corporate income taxes would be just as with so many other "improvements," the parts that eliminate corporate contributions would sail in smoothly and then the parts intended to make up the loss in government revenue would founder and the grotesquely weakened versions would be perverted and removed one my one. Obamacares is a great example but this is typical of reforms in the past 50 years.
A terrible article:
written by Dave, August 30, 2014 11:22
Here's a horrible example of an article on this subject, and from a previously good source:

http://www.thefiscaltimes.com/Columns/2014/08/29/Tax-Breaks-Tesla-States-Should-Think-Twice

I'm not a fan of pitting one state against another in a fight for businesses, but it is not even remotely comparable to pitting one country against another.

If I were president, I would stop by executive order the move of corporate headquarters of large US corps to other countries. Just say no.

Impeachment? Who cares. In today's political climate, a president that doesn't face impeachment is a bad president.

Estimates of size of tax compliance industry
written by Robert Salzberg, August 30, 2014 12:28
Supply side guru Arthur Laffer estimated in 2011:

"...U.S. taxpayers pay $431.1 billion annually, or 30 percent of total income taxes collected, just to comply with and administer the U.S. income tax system."(From Executive Summary)

Laffer estimated business compliance at $161.7 billion. Laffer states his figures don't include the efficiency costs of tax avoidance or tax evasion.

From page 18:

"With respect to the actual dollars spent complying with the tax code, the National Taxpayers Union estimates that total out of pocket costs are approximately $31.5 billion annually as of April 15, 2010."

"... the IRS Taxpayer Advocate Service “... estimates that the costs of complying with the individual and corporate income tax requirements in 2008 amounted to $163 billion—or a staggering 11 percent of aggregate income tax receipts.”

Laffer's estimates for individual tax compliance were inflated by using average wages, instead of median wages, of $68.42 an hour to conclude that the 3.16 billion hours individuals spent on tax compliance is valued at $216 billon. (Page 20 of report)

I couldn't find any newer or more comprehensive estimates of the tax compliance industry than Laffer's.


http://www.laffercenter.com/wp...lexity.pdf
...
written by Mary, August 30, 2014 4:12
I have some actual experience with the "Research" tax credit. This is indeed a very large, corrupt and useless business. The many tax consultants who feed off of it will scream as you try to kill them, but corporations will be happy to trade no tax for the end to the dodges. It would save them lots of money, since they don't have to have tax accountants. The activities that currently get reimbursed by the taxpayers as "research" include all the automation that is destroying jobs. THe vast size of this credit payout should make it very obvious that little research is involved. The IRS does not have the manpower or experience to police these sophisticated credits.
I suspect
written by Lord, August 30, 2014 6:09
the savings would only amount to half, the other half being continued to be spent on regulation and lobbying for favorable laws to increase incomes and reduce expenses (e.g. right to work, intellectual property).
Why not charge for the benefits of a corporate structure.
written by John Wright, August 30, 2014 6:35
Do not businesses incorporate, partially at least, for the very real benefit of limited liability of their shareholders.

So shareholders are limited in loss their investment and cannot be liable for additional amounts even though they are owners.

This argues corporations should pay society for this advantage, and one could argue this should not be based on profits, but on some measure that scales with the corporation's economic size (total revenues) or risk exposure (bank or oil company).

USA corporations receive many advantages such as the global presence of the USA military and US state department and government enforcement of intellectual property and trade laws.

If corporations maneuver to avoid taxes in the USA, the USA should be less willing to "go to bat" for them when they want USA help in their overseas operations.
...
written by Blissex, August 31, 2014 7:25
These stories depress me because "economists" even as good as Dean Baker seem unable to consider the practicalities of government.

The most effective tax strategy is to tax everything in sight, and with lowish and effectively uniform rates, in order to prevent clever accountants from diverting income from a taxed or higher taxed category to an untaxed or lower tax category.

As soon as you abolish taxing corporate income, clever accountants will divert personal income into corporate shells...

The game between the tax people and tax cheaters is always one of whack-a-mole, and giving the moles some big help is not smart.
...
written by Jim Harrison, August 31, 2014 1:23
I don't see how eliminating the corporate tax would destroy or even seriously discommode the tax avoidance industry, which already devotes much of its efforts to sheltering the super-rich from personal income taxes. If your reform is going to be revenue neutral, it will end up decreasing the progressively of personal taxes because people at the very top of the income distribution will have even more incentive to avoid taxes and will benefit from economies of scale in employing the lawyers, lobbyists, and other henchmen so that merely affluent or middle class earners will end up paying the bill. Jeffrey Winters has an excellent analysis of how this works in his book Oligarchy.

I think you're trying to find a non-political remedy for a political problem. No technical gimmick will compensate for the problems caused by the disproportionate power of the very rich.
No individuals will pay Goldman Sachs $500 million to shelter their money
written by Dean, August 31, 2014 2:36
Jim and others,

the argument is not whether there is an individual tax avoidance industry --of course there is . The question is how much does this grow in size when we raise individual taxes $250b -$350 billion, compared to the size of the corporate tax avoidance industry we will have eliminated.

We know the latter is massive. As I said, it is reasonable to believe that the former would increase in size by an amount roughly proportional to the tax increase (@25 percent). No one has given me any reason to question that perspective.

And, my bet is that 25 percent of the individual tax avoidance industry is way smaller than the CIT tax avoidance industry.
Tax Avoidance Industry Outsourcing...
written by Bryan, September 01, 2014 10:43
It would be nice, once the CIT is abolished, to see the subsequent speculative individual tax avoidance cash flow around the U.S. too-big-to-fails, and deluge into overseas firms, where the savings may be considerable.
hole digging
written by BenBen7, September 02, 2014 11:05
"they are getting paid really big bucks for the pointless hole-digging"

Don't think of the hole-digging as pointless. Think of it as like an expensive prison. The hole isn't the point, keeping the kinds of people who want to be investment bankers busy and away from the rest of society is the point! Do you really want a corporate lawyer becoming a teacher, a nurse or a social worker? What if they went into politics?

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Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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