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

[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.

[chron-job.livejournal.com]

What you say about corporate tax compliance is true, but is it very different for sole proprietorships and partnerships? Sure, an owner can't cease to exist and pop back up again like a corporation, but they can change where they are licensed andt headquartered. They can still avail themselves of many of the tax strategies you mention. Are you arguing for NO business taxes?

[politikitty.livejournal.com]

I think profit-based taxes are inherently inefficient and warp the economy in unexpected ways. It isn't well designed to collect revenue, and can easily make an economy poorer on the whole.

I think all business taxes are inherently regressive. It's entirely possible that in reality, investors bear the cost of business taxes to a higher extent than the poor. We are always finding ways human behavior deviates from any model. But given the inherent uncertainty, I find it preferable to tax the population directly.

That said, I think people have a low appetite for tax. A sales tax rate of 10% is sufficient to encourage tax avoidance. An indirect tax is an excellent way to raise revenue without raising the ire of the citizens. But we should be aware that we're buying more government than we'd agree to in a fair argument, and the government is ceding control of tax equality (whether it's regressive, progressive or some abomination of "flat") to the same entities we (particularly liberals) say can't be trusted with autonomy in so many other areas.

It's an area of hypocrisy that I think undermines a fair number of liberal values and goals.

[chron-job.livejournal.com]

Good point, and an interesting angle. I'll have to think about that.