What do readers think about Donald Trump’s proposed 15 percent corporate tax rate? Personally I think the Federales would end up collecting more taxes in the long run. As far as I can tell, the threshold where individuals and companies get serious about restructuring (usually in unproductive ways) to avoid taxes is a 20 percent rate. Below 20 percent and people will pay. Above 20 percent and people will devote time and attention that they could have spent growing the GDP instead toward the goal of paying less taxes.
“GE Transfers Bulk of Tax Team to PwC” (2017) is interesting because it reveals that our Boston neighbor GE had roughly 900 lawyers and certified public accountants at the end of 2016. These folks were effective at reducing GE’s tax rate to 0 percent (Boston Globe).
I think that there will be a lot more productive business activity in the U.S. if Americans don’t devote their best hours and best minds to figuring out how to keep more of what they have earned. Maybe the actual corporate tax paid will be a little lower due to the lower rate, but the extra business productivity will lead to more tax collected via payroll taxes, sales taxes, property taxes, etc.
I’m not sure if anyone has tried to measure how much the GDP has been shrunk by American enterprises setting up tax-avoidance vehicles offshore, Americans going to law school instead of engineering school, etc. (something like this aggregate analysis of the effects of U.S. family law would be nice)
Readers: What do you think? Presumably Congress won’t enact this into law (my theory is that any significant law that could be passed already has been), but what would happen if they did? (And what kind of vote is required to drop the tax rate? A simple majority? Could Republicans do this if they were unified? (which of course they aren’t!))
Economists explain that the deadweight loss for corporate taxes is greater than for a value-added tax. Stephen Gordon. So cutting corporate tax rates, and making up the revenue somewhere else, seems like a reasonable idea. Canada’s federal corporate tax rate is 15%.
The problem with Trump’s proposal is that it would add significantly to the deficit (something like $1 trillion over 10 years). So it looks like a non-starter without tax increases or spending cuts somewhere else. A value-added tax would make sense, but seems unlikely to happen. (Or Paul Ryan’s “border adjustment tax”, which is basically a value-added tax combined with a subsidy for US-based labor and capital.)
Republicans have a majority in the House and the Senate, and they have the White House. They can pass legislation as long as it doesn’t add to the long-term deficit (that would require 60 votes in the Senate). But I don’t think Trump has the knowledge and experience to be able to unify the Republicans around a common plan, even on Obamacare.
I should add that Canada’s provinces also have corporate taxes, so Canada’s overall corporate tax rate is more like 26.5%.
As you point out, most large corporations know how to avoid the taxes, e.g. by not repatriating overseas profits, and thus the operation is a wash for them.
A more important point is that reducing taxes is easy, reducing spending far less so. Since the credibility that low taxes will stick long term in the absence of spending cuts is zero, investors factor in the expectations that taxes will rise in the future, and thus the tax cut will not have the intended incentive effect.
Fazal: But it isn’t really a tax cut for the larger corporations with full-size tax departments. In fact, if they dismantle some of their offshore structures, stop inverting with their Irish, English, and Canadian friends, it could be a tax increase.
Well as long as we’re talking about things that will never ever happen, how about just excise taxes and tariffs and that’s it? That was the original system. It’s probably still doable, really. Just tax the hell out of various commodities, including oil and coal. Tax the imports even more.
There are a bunch of things that have highly inelastic demand and consumption basically tracks economic growth. Just tax those, and get rid of the IRS.
bobbybobbob: A high tax rate causes far more distortion / deadweight loss than a lower rate. So it’s better to tax income at 25% and consumption at 10% instead of only taxing consumption at 35%, for example.
@Russil
“The problem with Trump’s proposal is that it would add significantly to the deficit ”
Paul Samuelson and Nick Rowe (from the blog you’ve referenced) assure us that deficits are no problem given r < g.
Elasticity of demand for oil and coal and corn and copper is approximately nil, so there’s not really any room for “distortion.” Any attempt to use less of these things means lowering your lifestyle. You could also slap much bigger taxes on stuff like air travel, even with a private plane. There are no substitutes for such things.
@Ivan: What are you referring to? I did a quick search and found Nick Rowe talking about making sure that the debt/GDP ratio is stable. On the political side, legislation which adds to the deficit needs 60 votes to pass the Senate, which means it needs Democratic support.
If GE knows how to get their taxes down to zero, it seems highly unlikely that they would choose to pay 15% instead.
@Russil:
“the rate of interest will always be less than the growth rate, so the government can rollover the debt+interest forever, so there never is a cohort C that has to pay higher taxes”
http://worthwhile.typepad.com/worthwhile_canadian_initi/2012/10/the-burden-of-the-bad-monetary-policy-on-future-generations.html
Also:
http://worthwhile.typepad.com/worthwhile_canadian_initi/2012/01/the-30-years-debt-burden-non-war.html
http://worthwhile.typepad.com/worthwhile_canadian_initi/2015/02/debt-does-have-intergenerational-distributional-implications.html
I am in favor of lower taxes. I think everyone is in favor of lower taxes but Trump haters hate Trump so much they just disagree with him for no reason.
Mr. T. Sam, Trump was always insane from a fiscal perspective. He said we would spend much more on useless “infrastructure” and also useless “defense” while lowering taxes. This never made sense.
I always knew he was bonkers on the budget and economics. But I now deeply regret bothering to show up to vote for trump at all, because I thought we might get a saner foreign policy and a somewhat sane immigration policy out of it. It was the first time I bothered to vote in a presidential election in my life. Instead it appears Clinton might as well have won. He lied non-stop for a year. I was very upset about this Syria bombing nonsense and that nothing has been done to extract us from these immoral and dangerous messes overseas. Now he’s also not deporting anybody and is talking amnesty and has done nothing with regard to the crazy levels of legal visas and immigration. What a slap in the face.
I hope he is personally broke in five years. I think it might very well happen. He’s still highly leveraged. When rates spike he’s done.
Corporations (really just ethereal bits of legal fiction) can eventually do only two things with their net profits: pay them as dividends to shareholders, or invest them into growing the corp bigger. Both are good for the economy, which implies bigger profits = bigger economic benefits. So why not a corporate rate of 0% to maximize the economic benefits?
There is no magic number where people or companies give up trying to avoid taxes. Companies will spend $1 to save $1.01 in taxes. GE’s gross income for 2016 was $39.6bn. If those lawyers and accountants cost $200k each, that’s 0.4% to save 35%, or net of 34.6%–a bargain!
How do we know which economists are right in predicting the future?
It’s not like they go with zero accountants or lawyers. No matter how simple the rules are you still need to add all the paperwork, check it and file it.
Senorpablo: Agreed. But a lot of what has been happening is that companies have reduced their U.S. tax rate to near 0% while paying 12-20% to some other country (e.g., Ireland after an inversion). If companies can just pay 15% in the U.S. I don’t think they would put a huge amount of effort to move their tax home to Ireland and pay 12.5% there instead. See http://www.irishtimes.com/business/economy/trump-corporate-tax-plan-could-hurt-future-us-investment-in-ireland-1.3062482 for how the Irish are already worried about the reduced flow of corporate refugees.
Tekumse: Of course a company would still need bookkeepers (as distinct from accountants and tax lawyers) and probably accountants to set up the bookkeeping system.
dutchguilder: Why not a corporate tax rate of 0%? I think that there are economists who argue for that. It doesn’t seem politically practical in the U.S. Estonians seem to have figured out what you have. They tax corporate profit when it goes out the door as dividends. But I don’t think that could be explained to American voters.
It’s funny, one of my “permanent outrage” facebook friends describes this as Trump trying to give himself a big tax break. Aren’t real estate ventures already highly tax-optimized?
Philg: the problem with a 0% corporate tax rate is that the corporate tax allows the government to exercise control over corporate behavior by creating a system of incentives. If the tax rate were zero, there’d be no leverage with which to control. (That’s how companies get their rate down to zero)
superMike: So true! King Donald I was previously castigated for paying 0%. Now he is castigated for trying to lower his rate from 0% to 15%.
This whole debate is interesting. Nobody wants to confront the fact that the U.S. isn’t rich enough to support the government that voters want and that the percentage of GDP consumed by government makes this, in the long run, an unattractive place for a global business to operate. People think that there is some adjustment of tax rates that is going to make a country that spends 18 percent of GDP on health care and 5X the rich country average on infrastructure projects competitive as a corporate HQ.
It is their century. Turn off the lights and move there.
Most people incorporate themselves to avoid the healthcare penalties & self employment taxes. Whatever is the corporate tax is the new individual tax.
We should explore new ways of funding the government now that we are in the information age. First we should build a national economic infrastructure that records in real time all economic activity. Then we can implement tax policies that are like level 5 software development operations–adaptive and optimizing. Tax cheating will go to zero, and policy makers will have perfect real time data to work from.
for actual funding of things, i personally prefer a wealth tax to all others.
While doing his (complicated) taxes one year, my father suggested it would be simpler if the government just built a kind of screen around the sun and took a fraction of the sunlight coming out, making the world slightly darker.
Jack: Incorporating yourself and then having the corporation sell your labor back to the former W-2 employer falls into a separate category of entity, the Personal Service Corporation. This carries a different tax rate than regular corporations: http://thismatter.com/money/tax/personal-service-corporations.htm
It would be nice to see corporate taxes optimized for increased salaries. Take away the majority of the deductions but leave in place R&D, salaries, retirement, health care. The feds would get more at the individual level if people made more in salary.
Ivan: If I understand correctly, Nick Rowe is arguing against the view that deficits don’t matter.
“This whole debate is interesting. Nobody wants to confront the fact that the U.S. isn’t rich enough to support the government that voters want and that the percentage of GDP consumed by government makes this, in the long run, an unattractive place for a global business to operate. People think that there is some adjustment of tax rates that is going to make a country that spends 18 percent of GDP on health care and 5X the rich country average on infrastructure projects competitive as a corporate HQ.”
I would describe the problem differently: there’s a mismatch between the public services that Americans want and the taxes that they’re actually paying. Collectively, Americans need to decide whether they want less public services or higher taxes. I think less public services would be a hard sell, given that other countries (like Canada, which isn’t even as rich as the US) are able to provide good-quality public health care and education.
Philip, I think your jaundiced view may lead you to underestimate the strengths of American society. The US didn’t attain its position of world leadership by accident. The US recovered from the Great Depression without collapsing into dictatorship, fought Nazi Germany and Imperial Japan in World War II, contained the Soviet Union for 40 years without setting off a third world war, and achieved formal political equality for its black citizens, all under democratic government. On the economic front, the US had rapid, broadly distributed economic growth for the thirty years following World War II; the record since the mid-1970s has been more mixed, but the US economy is still the largest in the world. Despite everything, the US is still admired and even envied by a great many people around the world.