Monday, January 06, 2014

Corporate Taxes

I'm not a student of the issue, but I won't let that discourage me from having an opinion. The US has very high nominal corporate tax rates (35%) but much lower effective rates. Apple paid only 8.2% last year, for example. High tax rates plus abundant loopholes means that big companies can spend big money figuring out how to exploit this sort of gimmick. One such tactic is moving jobs overseas.

Laurence J. Kotlikoff has studied this, and proposes abolition of the corporate income tax in this NYT Op-Ed.

In recent decades, American workers have suffered one body blow after another: the decline in manufacturing, foreign competition, outsourcing, the Great Recession and smart machines that replace people everywhere you look. Amazon and Google are in a horse race to see how many humans they can put out of work with self-guided delivery drones and driverless cars. You wonder who will be left with incomes to buy what these robots deliver.

What can workers do to mitigate their plight? One useful step would be to lobby to eliminate the corporate income tax.

That might sound like a giveaway to the rich. It’s not. The rich, including Boeing’s stockholders, can take their companies and run — and not just from Washington State to, say, North Carolina. To avoid our federal corporate tax, they can, and often do, move their operations and jobs abroad. Apple’s tax return says it all: The company, according to one calculation, paid only 8.2 percent of its worldwide profits in United States corporate income taxes, thanks to piling up most of its profits and locating far too many of its operations overseas.

So what are the presumed benefits and how do you replace the lost revenue?

The size of the potential economic and welfare gains are stunningly large and don’t reflect any extreme supply-side (a k a, voodoo economics) assumptions. Fully eliminating the corporate income tax and replacing any loss in revenues with somewhat higher personal income tax rates leads to a huge short-run inflow of capital, raising the United States’ capital stock (machines and buildings) by 23 percent, output by 8 percent and the real wages of unskilled and skilled workers by 12 percent. Lowering the corporate rate tax to 9 percent while also closing loopholes is roughly revenue neutral and also produces very rapid increases in capital (by 17 percent), output (by 6 percent) and real wages (by 8 percent).

Eliminating the corporate tax and raising income tax rates or lowering the corporate tax rate and eliminating its loopholes are not the only options. Elsewhere, I have proposed eliminating the corporate income tax, but making shareholders pay income taxes on their companies’ profits as they accrue. This leaves companies with no tax reason to avoid operating in the United States but ensures that shareholders, not wage earners, make up for any revenue losses through higher personal tax payments.

I'd like to hear the downside.