If you get ever so slightly into a debate with one of our lefter leaning brothers and sisters a very common (and economically) important disagreement will be the issue of corporate taxes.
The bumper sticker line from the right is "we have the second-highest corporate tax rate in the world." (which is true).
The bumper sticker counter argument from the left will be "that's the statutory rate (if they even know that official word) and corporations pay much less than that because they get tax deductions and shield their money using loopholes and offshore subsidiaries" (which is also true).
The stated tax rate in the US is about 40% (depending on state taxes).
The estimates of the "effective tax rate" is anywhere from 17% to 32% and the difference is largely due to corporations moving their money overseas or through various accounting methods recognizing the majority of their income in lower taxes countries (Google for example setting up shop in Ireland).
NOW LISTEN TO ME AND FOLLOW ME VERY CAREFULLY for this economic lesson is vital to both people on the right and the left to understand.
99% of the time this argument comes up is because the two individuals are talking about how to create jobs and get the economy going again. The person on the right points out the high STATUTORY tax rate as a reason corporations don't invest here and are loth to create new jobs.
The person on the left will say the statutory rate doesn't matter, because corporations don't effectively pay that rate. They pay a much lower rate ergo why lower corporate taxes period?
However, here is the flaw in that thinking.
The person on the left thinks that the statutory rates don't matter. When in reality they DO matter because they are what drove corporations to shield their money offshore in the first place. In other words it is the statutory rate that drives the effective rate. Not the other way around.
Let us assume for instance that the very low estimate of 17% is the real effective tax rate.
The left is complaining about how corporations are "getting away" with such a low rate.
How do they get away with it though?
By shipping, sending, and investing their money offshore.
NOT HERE.
The obvious solution then would be to lower taxes to the point that corporations would not ship/invest/shield/deposit/etc., their money offshore, but rather HERE. You would have the same corporate tax revenue (actually more, because they'd be repatriating their funds back to the US) because there would be no change in the effective tax rate. It's just that in lowering the statutory tax rate to the same level of the effective tax rate corporations would redirect their money flows. One might think about giving them an extra percent or two just to make it worth their while to repatriate the funds here, so a statutory rate of say 15% would be in order.
However, the "obvious" solution if you ask the person on the left would be to "close the loopholes" and raise the effective tax rate to the statutory tax rate. Well that is what triggered the corporations to ship their money overseas in the first place. They didn't WANT to pay those taxes. And while simpleton logic and thinking would say, "ah ha! We have those corporations now! They'll finally be FORCED to pay the statutory tax rate!" all it will do is drive corporations further into the arms of lower taxed countries as they not just move and shield money overseas, but move entire corporate headquarters since the loopholes are closed.
Which now brings us full circle and you see where the people on the left have an argument that contradicts itself.
The whole POINT of the original argument was to assess the merits of lowering taxes to spur economic growth and job creation. The left's logical flaw in this stream of debate is that they fail to address whether such a lowering would help. They instead see red and go to the tidbit little bumper sticker and regurgitate, "Well corporations don't pay that rate!" which has NOTHING TO DO WITH THE QUESTION. They also fail to see that it is the high statutory rate that drives the low effective tax rate and thus capital and investment out of the US.
Since they don't understand that relationship, their solution is to make matter worse;
CLOSE THE LOOPHOLES
RAISE THE RATE
MAKE THOSE CORPORATE BASTARDS PAY
THAT'S going to woo corporations to reinvest in America??? A 5 year old could even see the flaw in the logic. Not that I wish to use such a violent analogy (but I can think of none other that would really do this justice as well as point out the absurdity of the left's solution), but it's literally like hitting your wife and when she runs away you conclude that you didn't hit her hard enough.
Of course, spousal abuse and leftist perceptions on corporations I believe share a common flaw - they are possessive and controlling.
They don't realize these corporations are NOT THEIRS.
They don't realize they have NO OWNERSHIP in the corporation and therefore logically (and morally) the corporation doesn't owe them squat!
But their behavior belies their true belief and that is they think corporations are here NOT to produce goods and services for their customers, but to generate revenue for the government so it can be spent on themselves. The corporation is there to serve the freeloader, not the customer.
Another common flaw (and one I use to win this argument when I invariably run into the Impenetrable Wall of Ignorance) is to ask them if they would like their 401k or 403b plans to go up in value. Or if they would like their pensions to be fully funded. NOT ONCE have I heard them say, "no."
Yet they fail to realize that it is corporate profits that drive the value of their retirement plans. Again eluding to The Impenetrable Wall of Ignorance.
Of course I don't expect to convince anybody on the left by this simple lesson in economics and logic. I'm simply putting there here for posterity's sake and for those of you who run into the "statutory vs. effective tax rate" debate you'll at least NOT be ignorant when you speak about it.
In the meantime, enjoy they decline.
Actually, the biggest problem is that they assume that people won't change their behavior when economic realities change. Every time I see a quote about someone saying some new policy will hurt job growth, it's "If hiring someone was profitable before, it'll still be profitable after." While that's true, it doesn't address the question of whether it'll still be profitable enough to justify hiring someone else, or splitting that new hire's work amongst existing staff. Or whether or not hiring someone had such a small margin of profitability that the new policy in question actually made hiring them no longer profitable.
ReplyDeleteIt's the same thing with people blaming the Bush tax cuts for the current deficit. Tax revenues went up during the Bush years, despite the cut in rates, but spending went up more. That caused the massive deficit we have now. The conclusion most people would draw is that lowering the rates increased economic activity that drove taxes, leading to increased revenues as a result. People who talk about raising rates don't seem to understand that people will adjust their behavior when their paycheck gets smaller. They'll save more, and be more critical when making purchasing decisions. If they don't believe that, point to the economy now. When money got tight, the savings rate skyrocketed, people finally started paying down their debts, and basically started conserving their wealth. This isn't a fluke, it's a pattern that people just don't seem to realize.
They don't realize that the money to pay the taxes comes from the cost of the goods produced.
ReplyDeleteIf the tax rate is increased, the cost of the goods has to increase, or the company will go bankrupt.
Corporations never pay tax. Corporations collect tax; from their employees (payroll deductions and compensation which becomes employer's share of payroll levies), their customers (sales & use taxes) and their shareholders (the "Corporate" income and capital taxes)
ReplyDeleteMaybe I'm oversimplifying, but isn't this a case of marginal vs average tax rates? The statutory rate would be the marginal rate, and the effective would be the average rate. Decisions are of course made based on the marginal rate. Just like a homeowner cares about their marginal tax rate (their current bracket) and not their average tax rate when considering the value of a mortgage interest deduction.
ReplyDeleteI have a similar view as this post: the sensible thing to do would be to lower rates so that businesses _want_ to base themselves in the US (as opposed to attemtping to trap+force them), but the real problem is that taxes, and corporate taxes in particular, are not really about revenue (the budget effectively runs on debt, and corp taxes are a small and easily removable piece), but rather about meeting people's emotional needs.
ReplyDeleteSpecifically, to get a sense of “at least someone’s kicking ass on the pointy-haired CEO – and that neighbor that makes 100x less than he does, but 4x as much as I do”
By the way Cap, if you’re reading this, thanks for the blogroll link
Escapist - No problem.
ReplyDeleteDalrock - Yes, there are some elements that are the same. However, the decision is not one of which to engage in additional business which would then put you in a higher tax bracket. It's whether to move capital outside of the country (ie- "capital flight") to avoid paying that bracket in the first place.
And you forget to mention a peripheral but important layer to this onion.
ReplyDeleteThat difference between Statutory and effective, requires armies of bureaucrats, both governmental to check up on the companies, and privately: masses of tax-lawyers, tax accountants, tax consultants, and more more accountants, lawyers, and finance guys too, who are smart, hardworking, and high paid and who basically doing yeoman service avoiding taxes and saving the company massive sums of money.
BUT, they are not doing anything productive, per se. They are playing the adult version of Dungeons and Dragons ( fun, but doesn't create anything new). Think of all the smart people who could be liberated from sterile tax calcs to the rough & tumble world of creating and accounting and quantifying new business.
The corporate taxes and all the hangers on are , at best, distorting the best business decisions, to be the best tax efficient decisions.
And I won't even get into the armies of wicked lobbists and corrupt politicians all messing about with the tax code provision details for fun and profit & power.
It's revolting.
They are playing the adult version of Dungeons and Dragons ( fun, but doesn't create anything new).
ReplyDeleteHey, as a regular D&D (and other RPGs) player I think you need to reconsider. My games provide several hours of entertainment for essentially zero cost (my rule book amortized a decade ago easily) for me and between four and six (depending on the game) other people.
Show me the tax code that adds that much to any place.