Seems like a good reason to level the playing field, no? We want businesses to succeed by providing better products and services at better prices, not by being extra good at bureaucratic arbitrage.
If he was proposing making the top-line number 15% and removing all deductions and credits, then you'd have a more compelling point.
Myself, I'm going to wait until a full tax plan comes out before passing judgement one way or another. One number devoid of context tells us nothing.
I think normalizing the tax rate to what the rest of the developed world has and making it simpler would bring the biggest benefit to smaller businesses such as mom and pop shops.
That's not true. Companies with large domestic brick-and-mortar businesses that account for most of their income often pay a lot more than that. CVS pays about 34%. Costco and Walmart pay about 30%. Most of the tricks with foreign tax havens or intellectual property licensing don't work for their kinds of business.
As a counterpoint, one could set the tax rate arbitrarily low and then carefully craft a dynamic function that achieves revenue neutrality based on that plan.
That said, corporate taxes[1] currently make up around 10% of the total US tax revenue, so major cuts (35% -> 15%) actually stand to result in a 4.2% drop in total US tax income. This assumes no positive change in corporate growth as a result of the reduced taxes.
1: http://www.taxpolicycenter.org/statistics/amount-revenue-sou...
Taxes are paid on profits, not gross revenue. If my company makes $1M net but I decide to expand my business by buying more equipment or staffing up I can spend that $1M on that and have a net of $0 profit and owe $0 in taxes.
Explain how by lowering the tax rate from 35% to 15% gives me any more money to expand my business when it is taxed on profit, which I could choose to reinvest as much as I want when I want and write it down (current, past or future years)?
All it does it does is it means when I have no where else to spend my profits that it shows up on the balance sheets as profit. Do you know who benefits from that? Shareholders, execs and board members.
All of that extra money will just get locked up in the bank accounts of the people who already can't figure out how to spend the money they already have. It does not create more revenue for the govt, it does not accelerate growth.
History has shown time and again supply side economics does not work. It's not just a theory, the Laffer Curve has been proven to be nonsense as much as it can outside of a vacuum.
The reason the wealthy love the idea is because there are only so many ways to create the growth on the balance sheets that the market demands each year and this would be an easy way to do it.
You think wealth inequality is bad now, wait until you see a 15% Corp tax rate. The people who will pay for the missing trillions in revenue will be the 99% that are already struggling. At some point the system will be too stressed and this could be the proverbial straw.
I would recommend those reflect on the origins of our tax system and how tax was to be derived exclusively from business income and not wages before feeling sympathy for the non-human entity called a corporation.
If you want to see a large influx of growth to the system you force that money to reenter the system. Making it illegal to use shell companies and tax havens purely to reduce tax liability would have injected trillions back into the economy that would have created some great outcomes just based on tax revenues and the need to reduce tax liability thru investment. Read healthcare, education, wages, infrastructure, better jobs, etc.
Shouldn't a tax reform close that possibility, which should raise a lot of tax revenue, which could then be used to cut corporate taxes, but now in a fair way?
It's a good thing that States are forced to compete with each other on offering suitable economic environments for the businesses that they wish to attract. Big corporations can offer significant tax revenues and employment opportunities for the states they call home. There's no reason why States shouldn't use whatever means are at their disposal to attract good companies for their citizens.
I'm saying states shouldn't be allowed to give tax breaks to individual companies and not to others. That's effectively having different tax codes for different companies.
It's is analogous to having different laws for different people (which, I assume would not be constitutional).
The point is to create good economic environments without allowing corporations to play states against each other.
Companies will still use tax loopholes but now the government will lose even more money.
Can anyone comment on how a lower corporate rate would likely affect S corps and incentives to form them? Maybe a new 15% rate wouldn't apply to such firms, but if it did, wouldn't it represent a pretty big new benefit/loophole for incorporation?
1) I'd prefer stories on government finances tell the whole story: Slashing taxes and government services by X. That may or may not be an acceptable trade-off, but usually it's presented as something like Walmart is slashing prices - there's a sale! - only looking at the cost side.
2) Present it as the zero-sum situation it is: If person A pays less, everyone else has to pay more for the same result. Somehow, people have to pay for things, and I think it's widely accepted that people should be making roughly equivalent sacrifices.
(That's not a call for a flat tax rate; 10% of income is much more of a sacrifice to someone making $10K than to someone making $1 million. FWIW, another HN reader told me recently that research says there is roughly a logarithmic relationship between utility and dollar amount.)
Something that sounds crazy, but way less crazy than what you are floating, would be to have something like a 90% tax on corps with a 3 or 5 year deferment to allow the profits to be invested back into the company. Then, whatever the Corp couldn't figure out how to spend in useful ways would go towards hiring instead of layoffs, raises instead of a race to bottom. The shareholders like me who make money for doing nothing but placing my money there wouldn't make such a killing, but I would rather see this country have a booming middle class than continue the wealth inequality to the point where I can't leave my house to use my toys and defend my big house against raids. I know that sounds a bit hyperbolic but if we stay on the current trend lines at some point in the distant future that day will come. Reducing Corp taxes and eliminating the estate tax are the types of things to accelerate that as opposed to putting us back to a good economic equilibrium.
a) money pulled out of business for personal consumption isn't driving the economy? - that's how other businesses make money
b) personal consumption isn't already taxed? That's what sales tax does right?
c) money pulled out of businesses isn't used to finance other businesses? eg. I live off dividends from my index funds while I bootstrap my startup.
To answer your points:
a) Yes, consumption drives the economy, but consumption does not 'multiply' like investment spending does. It would be much better for the economy for someone to buy a tractor than a speedboat, for example; the tractor is used to create more wealth, while the speedboat does not produce anything. We want to incentivize the investment type spending.
b) Yes personal consumption is already taxed. We would have to change the way and rate we tax to offset lost income, and do it in a way that is not regressive. If we get rid of corporate income tax, we can raise capital gains and income taxes on wealthy people without overly penalizing them.
c) Yes, you can obviously use money earned from one company to invest in another. A good tax structure would recognize that and encourage it.
I think all of this comes down to realizing that taxes do two things, raise revenue and drive behavior. We want to make sure the behaviors we cause are the ones we want as a society, while at the same time raising enough revenue to do the things government needs to do.
I also don't see the distinction: Why shouldn't corporations pay their share, and why should private citizens have to pay more to cover it (taxes are a zero sum game)? Why is a citizen's personal budget somehow of little value, but corporate budgets are sacrosanct? I'm more concerned with protecting private people than corporations.
> corporate taxes should be lower
Lower than what? On what basis do you say they currently are too high (or too low)?
In short, corporations never 'take' income. It is the shareholders and executives who 'take' the income. Tax the money at that point, and at a level that offsets the loss of corporate income taxes. This would not be shifting the burden to other citizens, it is just realizing the truth that a corporation isn't a REAL person, it is a group of people, and those are the people who should be taxed.
But, to truly level the playing field, we would also have to tax capital gains at the same rate as wages.
Or negative change due to reduction of necessary government services.
They won't bring it back if they have to pay 15% on it.
We let them bring it back for 5% in 2004 and the result was a net loss to the taxpayer, if I remember correctly. https://www.wsj.com/articles/SB10001424052970203633104576623...
Businesses which repatriated money ended up shedding jobs and cutting R&D, which hurt all Americans outside of the Capitalist class. And the lost revenue from the tax break cost the taxpayer billions.
But, of course, the biggest reason to avoid this scheme is that it failed.
12 years after we did this scheme to bring back some $350 billion, these companies learned that we can be bent to their will, and now they've hoarded some $2,500 billion. Nearly 10X larger horde!
If we give in a second time, we reinforce this behavior that they can horde their money until enough useful idiots will give them anything they want to bring it back. Rinse, and repeat the next time enough useful idiots think that bribing you today will stop you from demanding the bribe again tomorrow.
Also, to a degree it's based on the premise that these companies are overwhelmed with high taxes and that is determining their behavior. Perhaps they have other motives or the rate isn't really too high for them.
No, it won't. The only reason to repatriate it would be to spend it, which (since corporate "income" tax is a tax on retained profits, not income) would result in a 0% tax with or without the tax cut.
No matter how low (so long as it is non-negative) the US corporate tax rate goes, it makes no sense to reptriate the funds and pay taxes on them otherwise.
The only reason to move the money back to the US would be to hedge against a sudden rise of interest rate that would make funding hypothetical future US venture slightly more expensive. Obviously the rate at which such a hedging make sense is probably very low, single digit low.
On the contrary, I think a higher and progressive corporate tax rate would spur startups because it would serve as a governor to prevent large corporations (of the faceless variety) becoming large conglomerates - which generally have a depressive effect on the economy - thus giving smaller and more nimble startups an opportunity to compete.
> There is no other big market with such a low corporate tax.
Ireland's corporate tax rate is 12.5% ( https://en.wikipedia.org/wiki/Corporation_tax_in_the_Republi... ) and as Ireland is in the EU it has full access to the largest single market in the world - but I'll concede the EU's market is fragmented by localization issues and less demand for high-technology compared to North America.
Given that we are in an era of cheap credit, your friends sound insane.
We also have a lot of rules in place to prevent income from being double taxed, for example if my business pays taxes on $400,000 in profit and I take $150,000 in dividends, I get credit for the 15% in taxes that the business already paid and am only responsible for the other ~15% that I would have owed if I had made all of that $150,000 in regular personal income.
I was surprised to find that the US corporate tax system is so brutal compared to what we have here. Higher rates, double taxation, enforcing that you pay yourself a salary and not just dividends, etc.
Even "double taxation" is a talking point. Generally, money is taxed when it is transacted between entities: When someone pays a business (income), when you buy something (sales tax), when an employee is paid (personal income), etc. It's not taxed when it sits still. Money is double-, triple-, and in fact infinitely taxed, using the same definition, as it moves around different entities in the economy. The idea that the transaction between a corporation and its owners should be treated differently is very convenient to a select group of people.
But, indirectly, the biggest incentive that I can see would be with regard to retained earnings and reinvestment. For an S-corp, shareholders pay tax on profits according to their ownership percentage, irrespective of whether they even receive a distribution from those profits.
And, if on Jan 1, the company invests all of its profit in a new project (essentially wiping out the profit), it doesn't matter. Prior year taxes are still due from shareholders at the full rate. This can generally lead to forced distributions to shareholders just so they can cover taxes.
So, that's painful, especially for a business that's in growth/re-investment mode. Problem is, moving to a C-corp and being doubly-taxed at a 35% corporate rate, and again at a ~30% marginal personal rate is usually even more painful.
So, yeah, a much reduced corporate rate might allow for a different calculus there that incentivizes me to organize as a C Corp vs. S Corp. Let the company take the 15% corporate tax hit and keep the 20% balance vs the old rate. Plus minimize dividends to keep the max amount of money in the company to re-invest.
see my post above - at times trump has stated that this _would_ apply to pass-through entities (s-corps, sole proprietorships and LLCs). at the moment however, this point remains unclear.
- http://www.cbpp.org/research/federal-tax/will-new-trump-tax-... - http://www.cnbc.com/2016/11/22/trump-could-gain-the-most-fro... - https://taxfoundation.org/details-analysis-donald-trump-tax-...
In any case, unfortunately, I've yet to hear the political advocates for corporate tax reduction/elimination argue nearly as vociferously for an increase in capital gains taxes.
Now people want to give certain transactions a special status; for some creative reason, this time it's different. What I see is that the transactions that are 'special', such as corporate and estate taxes, benefit the same group of people. Also, the same people shouldn't have their income taxed as highly because they are more important than everyone - they are 'job creators'. How come it's never the taxes of the working class, such as sales tax, that need special treatment?
Would be interesting if it applied to pass-throughs though. Actually, more like completely nuts and ripe for abuse.
Well, 5% is probably too low. And I think they will bring it back for 15%. It costs money to maintain all these tax-minimization schemes globally. And America is still Apple's biggest market by far. Being able to leverage all that cash here could make a big difference to their bottom line.
If they are cash starved, it's because they have no credit and no horde.
The kind of targeted breaks I'm thinking of is e.g. this: http://app.leg.wa.gov/billsummary?BillNumber=2089&Year=2013#...
That's just basically Boeing saying "Give us a tax break of N billion or we move from Washington". Legislators afraid to lose their jobs approve. The state keeps the jobs, the legislators keep their jobs. Everyone is happy? Well, except the people in the state that lost a ton of tax revenue.
To be clear: this isn't a tax cut for "the Washington aerospace industry". There aren't going to be any competitors creating buildings for the manufacturing of plane fuselages in Washington state - it's a tax cut directed directly towards Boeing alone. You wouldn't have to be a star lawyer to prove that point.
The argument that "but they create jobs in the state so even with the tax break, Washington state benefits from having them there" doesn't float either. That's how blackmail works. I need my knee caps so even after paying the mobster $10000 for keeping them I come out ahead!
If states weren't able to offer company targeted tax breaks like that, then Boeing couldn't have blackmailed Washington legislators like that. Which would benefit everyone involved (Except of course - Boeing).
Boeing has a lot to offer a state. They could put their production in lots of places, including in other countries. If a state finds value in having Boeing there, there's nothing wrong with incentivizing them to go there.
If smaller businesses find that the state is hostile to them for one reason or another - maybe because they feel overtaxed because of big breaks for the big companies, then smaller businesses will not do as well in that state and will tend to migrate elsewhere. Then the state might need to rethink its tax policy like New York has been doing with its reduced rates for new businesses.
At the end of the day, we don't need the Federal government micro-managing the states. The USA wasn't formed that way and it would be yet another Federal overreach that would create backlash and perverse incentives. You mentioned the EU. The EU is dealing with that sort of backlash now with Brexit and other referenda. Overreach by central governments is a proven route to tyranny.
That isn't necessarily true. It could be due to other laws, such as the one that allows them to stash money overseas tax-free. Perhaps that's the law that should change.
https://www.thebalance.com/current-u-s-federal-government-ta...
(Also, I'm not sure what to think of that website: Their anti-government bias seems to show through and their understanding of economics is poor. For example, the following fails basic microeconomics and pricing: the entire U.S. tax burden really falls on individuals. That's because corporations pass on their tax burden to families in the form of higher prices or lower wages. / Corporations must maintain their profit margin to satisfy stockholders, so they pass on any additional corporate taxes to consumers or workers. If only my company could just set whatever price and wages it wanted, and consumers and workers continued to buy and hire on at the same rate!)
It will be interesting though to see what tax cuts do in such a low-growth environment. In the end it seems Wall St. will be the big winner. There's plenty of actual evidence that tax cuts (a) eventually make it back to investors once finance takes its cut and (b) tax cuts lead to most firms adopting a much higher risk profile [2]. Ironically we could see lots of mergers and overseas expansion.
[1] http://graphics8.nytimes.com/news/business/0915taxesandecono...
[2] https://www.bloomberg.com/news/articles/2017-04-19/u-s-tax-c...
I wasn't clear: I don't know that I accept that, though of course I've heard it many times. It's a narrative that suits people who want to cut taxes for corporations, but those people always have very convenient narratives. Has anyone seen evidence?