Why a Corporate Tax Rate at All?

[badlydrawnjeff.livejournal.com]

Today, President Obama unveiled his latest plan to reform the corporate tax structure. I'm not too curious about the community's thoughts on this overall since I'm fairly sure we all know where we all sit on Obama making good/bad choices here, but I do have a more general question:

Why have a corporate tax rate at all?

I'd like to think we all agree on these basic points:

a) The corporate tax rate is not really paid by the corporation or business in question. Taxes are simply another cost that is levied on a company, a cost recouped through fewer services, lower wages/employment, higher prices, or some combination therein. It's not an issue of "fair share," really, since we're all paying it.

b) Our corporate tax rate is comparatively high when stacked up against other nations. We're #1 in the OECD at 35%. Canada, directly to our north, is at 15%. And that's without factoring in the corporate tax rates of individual states. Whether you think this matters much is up to you.

c) We only tax profits, and that's proper: If a company doesn't make a profit, it's not paying that tax rate. It's one reason why many corporations don't end up having a tax obligation.

d) We offer a lot of tax credits and opportunities to lower the effective rate: From green energy tax credits to employment credits, even profitable companies are able to reduce their effective rate to zero - or lower.

e) Corporate taxes account for a fairly small amount of overall receipts: Well under $250b in 2010.

So the question I pose is this - if you're in favor of a corporate tax at all, why? Is it worth it given what we all know and agree on? Is the value of getting $220b in revenue from the corporations worth it?

Comments

[pastorlenny.livejournal.com]

The first point is absurd. That's like saying corporations don't pay salaries because, hey, it just passes along those costs in the form of prices.

Really, people should work for free -- because corporations produce things we all need!

[a-new-machine.livejournal.com]

Even if it were valid, every tax works like this. Income taxes mean fewer ice cream cones or cars bought. Tariffs obviously pass costs along, as do any transaction taxes. What sort of tax wouldn't have this ripple effect on others who would arguably be "paying the tax"?

[kayjayuu.livejournal.com]

How is it absurd? Can a tax be levied on a corporation and not passed along as a cost of doing business? If so, how?

[politikitty.livejournal.com]

This was Ronald Coase's hypothesis when he went to America to work on his thesis project that eventually became "The Theory of the Firm".

Everyone was all anti-socialism, and he wanted to understand the limits between corporate management and socialism. He found that corporate management lowers transaction costs, but trying to build a corporation too big basically breaks down the price mechanisms that help a firm decide how many widgets to produce.

Aba Lerner went down to Mexico and told Trotsky that socialism could work if the government would set price & quantity at the marginal cost. Essentially that socialism could match capitalism, but never exceed it.

My salary is paid for by the billions of people who buy [x] jeans. If I only needed jeans, I could easily work for free. Since I need guns and butter, and the jean company doesn't own the guns and butter company, they give me money to spend at the other companies.

I could easily add a few dollars to each purchase and pay my taxes through the guns and butter companies. Or take a few extra dollars from my salary at the jeans company. But that would require me to trust them to charge me my fair share of taxes. If I were a particularly indispensable worker or a very picky consumer, I could easily negotiate a lower tax rate. I want a higher salary and lower priced goods and they'll shift the tax burden onto those who cannot easily negotiate a high salary because unemployment is through the roof and they have 500 qualified applicants for every open position.

It's pure elasticity.

So yes. Corporations pay taxes. They pass the costs on to us, and bear none of the burden. Given market realities, you cannot guarantee both a progressive tax system and a corporate tax. They're incompatible.

[fizzyland.livejournal.com]

Companies in the United States pay almost half the taxes that companies in other rich countries pay

I think we're done here and if you disagree I will have to refer to you as a "lunatic" that refuses to take an "adult" approach to the issue of taxes.

[badlydrawnjeff.livejournal.com]

Where is that quote coming from?

[politikitty.livejournal.com]

That is so patently false (http://www.doingbusiness.org/~/media/FPDKM/Doing%20Business/Documents/Special-Reports/Paying-Taxes-2012.pdf). America pays a Total Tax Rate of 46.7%, while the EU average is 43.4%

As someone who makes their living dealing with the large amount of business taxes that don't fall under the heading of "Federal Corporate Income Tax", I hate that this intellectually weak argument gets passed around.

[soliloquy76.livejournal.com]

I could get on board with no federal taxes for corporations, but only if corporations lose their influence in electoral politics. That means zero influence in political campaigns, either monetary or otherwise. No funneling money through individuals or SuperPACs and no funding of advertisements. Any corporation caught doing this would either be fined or lose their tax exemption.

Lobbying would still be OK, though.

[badlydrawnjeff.livejournal.com]

No taxation, no representation, in other words?

[politikitty.livejournal.com]

Uh, corporations pay for the bulk of public school via property taxes. The richest school district in Texas is where the last of the oil fields are held by Chevron, Exxon and the like. Does that mean they should have more say than parents?

[dwer.livejournal.com]

I'd like to think we all agree on these basic points:

Yes, I'm sure you would.

Tell ya what. Reverse Citizens United, and I'd be in favor of a reimbursement of all federal taxes to corporations that keep 90% of their employees and 100% of their manufacturing within US borders.

But first you'd have to write, 3000 times, "Corporations are not people. I will not seek to pretend that Pepsi has First Amendment rights."

[chron-job.livejournal.com]

From a user fee based view, being a corporation has some benefit (else why isn't everything a partnership or solely owned proprietorship?) yet has some administrative costs. At the very VERY least, there should be some way to fund the administrative and criminal policing costs that are created by the existence of corporations.

[oslo.livejournal.com]

The corporate tax rate is not really paid by the corporation or business in question. Taxes are simply another cost that is levied on a company, a cost recouped through fewer services, lower wages/employment, higher prices, or some combination therein. It's not an issue of "fair share," really, since we're all paying it.

As pastorlenny pointed out, this is true of any cost of business, so it doesn't cut either way.

Our corporate tax rate is comparatively high when stacked up against other nations. We're #1 in the OECD at 35%. Canada, directly to our north, is at 15%. And that's without factoring in the corporate tax rates of individual states.

You're also not factoring in the deductions and exemptions that bring that effective rate back down. Taking those into account, we're much closer to what is typical, though still on the higher end.

We only tax profits, and that's proper.

Sure. But this doesn't cut either way.

We offer a lot of tax credits and opportunities to lower the effective rate.

We probably should offer fewer of these and make those that remain smarter and more narrowly focused on providing "bang for the buck," so to speak. Kind of like what Obama's proposing.

Corporate taxes account for a fairly small amount of overall receipts.

The amount they pay could probably be higher if we clamp down on evasion. And $225 billion is still about 9.7% of gross receipts, the third largest share of the categories named in the link you've provided.

So the question I pose is this - if you're in favor of a corporate tax at all, why? Is it worth it given what we all know and agree on? Is the value of getting $220b in revenue from the corporations worth it?

Strangely, none of your points address anything having to do with anything that might be relevant to these questions. Is it worth it? I don't know, do we spend more than $225 billion collecting them? If not, then it does seem to be "worth it," at least fiscally speaking. It's a sizable chunk of revenue. And if we, as individuals, are just paying the taxes indirectly, then what difference does it make whether we pay them as individuals or via corporate taxes?

Basically, you've provided plenty of reasons for Obama's plan. You say: corporate taxes are high relative to the rest of the world; they'd be even higher if we didn't have so many complicated deductions and exemptions; and we don't get as much in receipts as we could. Hence: Obama's plan, and not Congressional Republicans, who want to cut the nominal rate even lower and keep all of the complexity of the code.

[politikitty.livejournal.com]

Are you for a progressive tax rate?

If so, why would you allow a corporation to determine how to determine the indirect tax rate? An indirect tax rate would be determined by elasticity rather than ability to pay. Since a poor person consumes more inelastic goods than a rich person, they would inherently shoulder most of a corporate tax.

Further you're ignoring the fact that companies engage in all sorts of activity specifically to minimize their tax obligations. They spend a considerable amount of the budget managing tax compliance. Amazon closed a distribution center in Texas to avoid collecting sales tax from their customers. (http://articles.businessinsider.com/2011-02-14/news/30098776_1_sales-taxes-comptroller-amazon) Many others are leaving because their Franchise Tax is prohibitive in an otherwise pro-business state. This is not tax evasion. It's tax strategy and we have built a tax system to encourage businesses to act in inefficient ways.

There might be many reasons to close any given location. But taxes shouldn't enter the picture*. Taxes should be distributed in a way that it does not warp typical market behavior. Most corporate taxes inherently fail at this because corporations don't have to pursue profits. They can instead expand and buy more operating capacity. They don't need to own land. They don't need to have a large work-force. They don't need to be capital intensive. They can dissolve without anyone actually having to die. They are inherently flexible and can change their behavior under the slightest provocation in a way that ordinary people cannot.

That inefficiency is a cost. And there's no reason to think it doesn't add up to 230 billion. It might not add up to 230 billion in the coffers. And it might fall short of 230 billion, after all the calculations are said and done. But the opportunity cost is much larger than the amount the IRS spends to administer the Corporate Income Tax.

*I am a fan of Pigovian taxes/breaks. But these are not be designed to raise revenue. If a Pigovian tax works, the undesired activity is avoided and the revenue is minimal. Revenue-generating taxes should avoid promoting or discouraging any given behavior.

[kylinrouge.livejournal.com]

We're locked in a system. You can't cut taxes in a vacuum. $250b less in taxes is $250b less in what those taxes pay for. I hear the response is always 'cut', when when I ask what it's 'entitlements'. No thanks.

[oslo.livejournal.com]

As for a positive argument in favor of corporate taxation - as an initial matter, I have to say that I find a lot of appeal in eliminating the whole "double taxation" issue and having individuals paying a single, direct rate, that can then give them a more transparent picture of what they're getting for their tax dollars.

The problem with this argument and its reliance on the "double taxation" concept is that eliminating the "double tax" results in this kind of transparency only if you either (i) have a direct flow-through of profits from corporations to shareholders and/or (ii) shareholders pay income tax on the capital gain they realize when they sell their stock.

To see this, imagine what happens in a world where corporations aren't taxed on their profits. Do they make timely dividend payments to their shareholders that can then be taxed? No, of course not. The Board retains that value. That results in an increase to enterprise and shareholder value, which isn't taxed, that likely would correspond to a higher sale price for shares in the corporation. If the shareholders then sell their shares, they would receive a capital gain on the price they originally paid, which would be taxed at a preferential rate in our system. So, they're basically avoiding income tax by converting it into capital gain. Note that, for public securities, the conversion becomes even easier - it'd be like a piggy bank. You buy stock for $100 today; a year from now the company has $10 attributable to your stock in profits that they retain; your stock becomes worth $110; you sell that stock and then buy $100 worth of stock. Then you have $10 of income and $100 stock, but you pay only capital gains on your "investment."

Now, I understand that you think that capital investment is so valuable that we ought to tax it at a preferential rate (though this has never been explained to me adequately), but the question is, here, whether we ought to recognize that $10 profit, which derives from income to the company - i.e., the difference between the cost of producing a product or service and the price received for selling it and not from capital appreciation - as a "capital gain" worthy of such a preferential rate.

Basically, it's tax structuring on the cheap. My clients are always looking for this kind of result - zeroing out corporate taxes would make it available to everyone.

[the-rukh.livejournal.com]

Specifically, C is the reason why corporate taxes are valid.

[usekh.livejournal.com]

If you want corporations to be considered people, then shouldn't they have to pay taxes?

[a-new-machine.livejournal.com]

That's pretty facile, and not all that helpful. Should every person who wants rights be required to pay taxes? I didn't pay a cent in federal taxes in the last three years, since I've been in school. The whole corporate personhood argument is separate from the argument over wise tax policy, and rightly so.

[musicpsych.livejournal.com]

Corporations benefit from a variety of government programs, from infrastructure to education of the citizenry, even national defense and safety regulations. I know it's kind of lame to say, "give us money for these services we are assuming you are benefiting from," but why shouldn't they bear some of the cost? That's kind of what happens currently to taxes on citizens - my taxes go to public school funds, even though I don't have kids, and my taxes pay for the fire department, even though I've never had to use their services.

I know you said that $220b is a small number, but if you wanted to cut that, what would you put in its place so that the deficit wouldn't be even bigger? I dislike arguments saying that the money is too small to worry about, since even small figures add up. Would individual income tax rates have to be raised to make up for it?

I dislike point d. You are right, companies are able to reduce their effective rate to zero, but that to me is an argument to get rid of those tax credits.

[blueduck37.livejournal.com]

I think we should only tax poor people.

No person making a quarter million $ or more should ever be taxed, as they are too precious.

[eracerhead.livejournal.com]

Since corporate entities reap the benefits paid for by the taxpayer, they should also play a part in paying for it. Case in point: all the laws being passed to enforce copyright. This costs money. Why should an individual artist pay for it through taxation but not Time-Warner?

This idea that taxation is just a black hole that provides no value is faulty. Corporations need to pay for these services as well.

[badlydrawnjeff.livejournal.com]

But, again, the corporation isn't really paying it. A corporation/business is unique in that it is able to pass along all of its costs - I'm asking why keeping that facade up that corporations are actually paying any taxes is reasonable.

[enders-shadow.livejournal.com]

If I never shop at Wal-Mart, I never pay Wal-Mart's taxes.
That is at least one reason that A) is foolish.

The rest of your reasons are nonsense as well.

B) is whatever. I have no problem with the highest corporate tax being at 35%. As you note, in point C) that we only tax profits, I'm sure we are not taxing everybody at 35%. D) supports this too, 35% is only the TOP tax rate.

As for E) how about you just cough up $250B to replace the $250B we get from corporations?
It's absurd to claim: "this isn't that much money!" meanwhile NPR and the teachers unions get blamed for the trillion dollar deficit....

So yes, tax the corporations. Tax anybody or anything who has profits in the BILLIONS.

And again, I don't pay wal-mart no fucking money, so I sure as shit ain't paying their tax bill.

And as people point out above: ALL corporations have a cost of doing business. We aren't touching that. We are only taking a cut from the PROFITS. That is, after costs are COVERED and businesses have ALREADY PAID their employees (hence, no need to lower wages)

[politikitty.livejournal.com]

Tax incidence is way more complicated than that.

Investors are fickle and have billions of investment options open to them. They don't need to worry about what tax rate a corporation pays, and only care about what the return will be for them at any given risk tolerance.

So businesses need to maximize the after-tax profit. Other costs will be squeezed to deal with the higher cost of business and the shifted supply curve. The costs will be shifted to people who are least able to negotiate. So people who desperately need a job will take a lower wage than a fat cat with a golden umbrella who can walk away from a paltry 1.5 million dollar salary.

I can get great prices on vacations, electronics, high end clothing and any given luxury. A soft economy gives me that negotiation. But my rent, food and other necessities are through the roof, and I have to suck it up just like a person making half my salary. But it hurts me a lot less than a person making half my salary.

Taxation is one method we can ameliorate the inequalities of the market. By demanding the corporations do the heavy lifting, you're instead exacerbating the inequalities for faux 'economic justice'.

[squidb0i.livejournal.com]

Yes, because we can then use that 220billion to maintain the infrastructure and services that make corporations, profits, jobs, and society itself possible.

[politikitty.livejournal.com]

That ignores tax incidence.

If corporations don't pay the tax, do we want to give up control in deciding who can equitably pay for that infrastructure and services?

[sophia-sadek.livejournal.com]

I oppose corporate taxation because it prevents foreign investors from profiting as much as they possibly could from the work of Americans.

[nevermind6794.livejournal.com]

On a rough gradient from philosophical to practical:

a.) Because whenever money is transferred between legal entities (not people) in exchange for goods and services, and there is a resulting profit, it should generally be taxed.

b.) Because corporations are legal entities with bank accounts independent of other stakeholders (employees, customers, local people), and consequently benefit from public investments. Thus they should bear some of those costs.

c.) Because if corporations aren't taxed, they can hoard money (and increase stock prices, oddly enough, a la Apple) and create another sort of Gilded Age. We need money to flow for our economy to work properly.

d.) Because that's where the money is.