My Facebook friends continue to be filled with wrath regarding the Republican proposal to cut corporate tax rates to the levels that prevail in Europe (18.9 percent, average). One friend, for example, recently cited to “The Republican War on College: For the cost of cutting corporate income taxes, the U.S. could provide universal pre-K and make tuition free at public colleges for nonaffluent students.” (Atlantic)
These same folks often cite European welfare states as examples to which the U.S. should aspire. I’m wondering if those same welfare states haven’t proven that it isn’t possible to sustain a high corporate tax rate.
The average human is reluctant to move and the average American is no longer even willing to move from state to state (see Tyler Cowen: “These days Americans are less likely to switch jobs, less likely to move around the country, and, on a given day, less likely to go outside the house at all.”). But corporate shells don’t miss friends and family when they move to Bermuda (tax-free), or Ireland (12.5 percent tax), or nowhere at all (Apple Computer’s profits!).
I wonder if we’ve already run this experiment on a smaller scale here in the U.S. among the states. In theory a lot of states have corporate income taxes. But in practice the big companies don’t need to pay this because they demand 20 years of tax-free living in exchange for locating a headquarters or factory in a state. So if our states can’t collect these taxes in practice, except on some hapless small businesses that don’t generate much profit, why is there any possibility of collecting big $$ at the national level now that world business is global?
The Europeans became experts at collecting the highest possible percentage of GDP as tax revenue to run their massive welfare states (since trimmed back, of course, and now the U.S. has caught up!). If Europe can’t make high corporate income tax rates work, why do we think that we can?
[The Facebook friends who are most vehement about the need to retain high corporate tax rates are those who have never worked as a private-sector manager. I did a little bit of questioning and it seems that there are two assumptions underlying their passion for the current tax code: (1) the supply of rich people and rich companies is essentially fixed and one need not be concerned about the U.S. getting a share of the next crop of rich people and companies, (2) corporations will not move in order to shield shareholders’ money from high tax rates (“everyone wants to be in the US” was one response). So maybe the debate is actually about whether or not corporations and business capital are mobile.]
Related:
- “Swedish government proposes corporate tax cut to 20 percent” (Reuters), about a proposal to cut from 22 to 20 (U.S. federal plus state rate can be over 40 percent)
Kentucky experiment showed that cutting taxes doesn’t work either. Cutting taxes in Kentucky didn’t bring any of the benefits that the Republicans are screaming about. Nobody talks about this failed experiment. I understand why Republicans are not. Why not Democrats though?
This is a just a part of a much bigger problem. Everything in today’s economy, both private and government, depends on exponential growth. Stock values depend on exponential growth, public pensions depend on exponential growth, this of course in the long term will lead to society collapsing. Big companies and wealthy individuals have the lawyers and accountants to minimize their tax bill, small companies and normal people do not. Of course companies are going to seek lower taxes, their only reason for existence is profit. Any other “mission statement” is BS, if a company does not seek profit through all available means, they can be sued by their shareholders. The current economic system also rewards rent seeking which does not provide any value to society. Private companies want to grow and minimize the tax they pay, government wants to grow to infinity and maximize the tax that everybody pays. Eventually this tug of war will destroy society. It does not matter if Democrats or Republicans are in power, both do not understand the much larger problem.
The reason that people do not want to move is that they have no more hope, they do not see an economic advantage, the average person has been reduced to a value of disposable garbage. Unfortunately as more of the economy becomes more and more specialized a person with average intelligence and skill level does not have the required intelligence and/or knowledge, only the best will survive in today’s economy, the rest are just disposable. Even low level jobs like being a Uber driver are going to be replaced with autonomous cars very soon. Same with Walmart employees, the store will be run by robots and AI and be open 24hours/day holidays included.
It should be in our corporate culture that companies should pay tax and contribute to society, not to hide it on some tax free island.
The tax systems both in the US and Canada are overly complex, everybody has some sort of exemption or loop hole. It has to be changed to a progress rate system that has no exemptions or loop holes and governments have to abandon growth. If the tax systems had less exemptions and loop holes then it actually maybe more fair, or course this will never happen, because what would the governments do if they can’t reward those who got them into power.
Put together the required exponential economic growth together with environmental damage and climate change and you will have the end of society. Anybody that believes in human exceptionalism is an idiot.
Dan: I don’t know if they’ve cut taxes in Kentucky, but it certainly does not seem to be a low tax state. https://taxfoundation.org/state/kentucky/ says that residents pay 9.5 percent of their income in taxes (compare to 7.6 percent in Texas or 7.9 percent in New Hampshire).
In any case, it seems that the corporate tax rate for big companies in Kentucky is 0 percent. See https://www.usnews.com/news/best-states/kentucky/articles/2017-04-10/toyota-announces-133-billion-investment-in-kentucky-plant for example: “State officials added up to $43.5 million in tax incentives, making Toyota eligible for up to $190 million in incentives that span multiple projects. The performance-based incentives allow Toyota to keep a portion of its investment through corporate income tax credits … ” and https://www.reuters.com/article/toyota-kentucky-lexus/toyota-offered-147-mln-tax-break-to-build-new-model-in-kentucky-idUSL3N0D52XO20130418
Also, be sure to check a state’s family law before moving! What would be a $200,000 per year child support entitlement in Massachusetts, for example, might turn into $15,000 per year in Kentucky (see http://www.realworlddivorce.com/Kentucky ).
Dan: Don’t you mean Kansas, not Kentucky? Vox: Kansas Republicans end the state’s failed tax reform experiment.
Philip: When you say that high corporate tax rates are “unsustainable”, what do you mean? 9% of federal government revenue comes from corporate taxes (about $400 billion in 2016). FRED. Cutting corporate taxes means that this difference needs to be made up elsewhere.
Cutting corporate tax rates would likely result in inflows of foreign capital – but this would also boost outflows of investment income to foreign owners, reducing the net benefit to Americans. Paul Krugman explains.
Is the US economy really suffering from a lack of capital? It doesn’t seem like it to me. The Economist: Foreign direct investment inflows.
For countries that aren’t as attractive as the US as a destination for investment, shifting taxes away from corporate profits may be a good idea: it raises the return on investment, attracting foreign capital. Stephen Gordon explains.
philg: The reason the corporate tax rate for big companies in Kentucky is 0 percent, is the same reason that offshore investors in residential realestate are not taxed in Canada. The respective governments depend on attracting businesses and investors to provide cash flow for jobs. They are counting on the people employed by those companies and investors to pay taxes to make up for the short fall of tax revenue from companies like Toyota in Kentucky and offshore realestate investors in Canada.
Unlike U.S. states the Federal Government can impose tariffs so the interstate “experiment” is not representative of the international environment.
Russil: Kansas is not a low-tax state. https://taxfoundation.org/state/kansas/ says that they collect 9.5 percent of residents’ income in tax. So whatever “experiment” they did would not have made Kansas competitive with the low-tax states as a place to do business. (Well, if the business is “have sex with an already-married surgeon and retire comfortably” it would work; Kansas offers unlimited child support profits and the cash received is tax-free; see http://www.realworlddivorce.com/Kansas )
Why are corporate income taxes unsustainable? Because the tax base is departing. Every time that a U.S.-based company moves to be based in Ireland or Canada or the UK, the base shrinks. (Or every time a U.S. company “pulls an Apple” and moves its intellectual property offshore.) There is no long-term way to collect a lot of money from a shrinking base, regardless of how high you can crank up the rates.
Regarding your INFLOW-only chart… We attract some foreign direct investment? Why not? We’re part of the global economy so there should be both inflows and outflows (https://data.worldbank.org/indicator/BM.KLT.DINV.WD.GD.ZS shows that, overall, we have a net outflow and therefore more capital leaves the U.S. than we attract). Why would there be any inflows at all? A company based in the UK can build a factory in the U.S., take advantage of cheap labor (maybe undocumented immigrants!), and make sure that any profits are taxed in the UK (intellectual property and components used in the factory will be purchased from the UK parent at sufficiently high prices to ensure that the U.S. subsidiary is only break-even). Also, that chart should be adjusted for population size. It sounds great that the U.S. attracted nearly 4X as much investment in 2015 as Ireland. But since the U.S. has 70X the population, the Irish people turn out to be 17X more successful at bringing in foreign investment. (France looks pretty bad on a per-capita basis too!)
Looking at inflows only you’d rate America’s supermarkets as truly awesome enterprises. You’d also be happy to pay $50,000 per share for Amazon since you’d be looking only at their tremendous revenue and not what they need to pay for the goods that they supply.
philg: The Worldbank website has pages for both “net inflows” and “net outflows” so you have to combine them to get the real “net” number which indicates that US investment inflows exceeded outflows by nearly 1% of gdp in 2016. This is is consistent with the FRED data: https://fred.stlouisfed.org/series/BPFADI03USA637N and the fact the the U.S. has run a trade deficit for some time (investment and trade are on opposite sides of the international trade accounting equation). The U.S. is not having trouble attracting foreign investment.
This has been a fascinating discussion.
Russel Wvong: you’ve asked what does Phil mean by “current tax rates may be unsustainable” ? I have used that great FRED tool you linked to get some data about how big a part of federal tax revenues is made up of corporate tax revenues. I’ve started from the FCTAX series you’ve linked (Tax Receipts on Corporate Income), and divided it by current federal tax receipts (W006RC1Q027SBEA).
https://fred.stlouisfed.org/graph/?g=fPWd
As one can see it’s gone down from a peak of 10% in 1950 to less than 5% in the 80s. Only the peaks are breaking over 5% since the 80s, actually. So this seems to support Phil’s idea that corporate tax rates were unsustainable at their high pre-80s level.
Regarding unwillingness to move, I assume it gets extra difficult when your spouse has a job too, or if you still want to see your kids after the divorce.
It might be a better idea to poach human capital from other states, for example by running a top notch university or two. Students are willing to move but then settle down, quite possibly in the same state.
Ovi C: The alternative explanation for the FRED data you reference in #9 is that Congress has, through action or inaction, chosen to lower corporate tax revenues as a percentage of federal tax revenues. No compelling evidence has been presented in this thread refuting this potential explanation. For example, philg has correctly pointed out that corporate inversions are responsible for some of the drop in corporate tax collections while ignoring the fact that Congress clearly has the constitutional authority to close the corporate tax loophole and has CHOSEN not to.
Ovi: there was definitely a major change in policy in the 1980s, but since then, corporate taxes have fluctuated around 2% of GDP. FRED: corporate tax receipts divided by GDP, 1947-2015.
Philip: Kansas tried cutting tax rates significantly, expecting this to boost economic growth. William Gale, Brookings:
Why wouldn’t cutting taxes as low as possible lead to amazing levels of economic growth? This is the “government as consumer” fallacy. Taxation and spending is basically a form of collective shopping. For some goods (food, clothing) it makes no sense to buy them collectively. For others (roads, insurance) it does make sense.
Joseph Heath, Economics Without Illusions:
None of that stuff about Kansas makes sense. According to the Tax Foundation, It has much higher taxes than Texas (and a bunch of other states). So if you care about minimizing tax liability you would move to Texas or another low-tax state. If you’re stuck in Kansas for practical or sentimental reasons then you will pay whatever rates prevail. I don’t know why anyone would have expected a big boost in economic growth from setting Kansas tax rates slightly lower than before, but still much higher than what Texas collects.
“So if you care about minimizing tax liability you would move to Texas or another low-tax state”
should read
“So if you care ONLY about minimizing tax liability you would move to Texas or another low-tax state”
In reality, businesses do care about tax liability, but it is only one of many factors which go into deciding where to site a business unit.
“None of that stuff about Kansas makes sense.”
The argument is that cutting tax rates increases the return on investment. This should increase investment, boosting economic growth. Arthur Laffer and Stephen Moore claimed that this increase in growth would be so large that the increase in tax revenue would compensate for the tax cuts. See The brain behind the Brownback tax cuts, a 2012 profile of Arthur Laffer.
Mainstream economists dismissed Laffer and Moore’s claims as voodoo economics, but Brownback went ahead with the proposed tax cuts. So now we know: they failed both in theory and in practice.
Don’t give up so quickly. It hasn’t been tried until there are half a dozen ruined countries and a hundred million dead. Indeed, the remaining proponents argue that it hasn’t been properly tried at all yet. Excuse me, it’s time for my company struggle session.
One problem with these tax arguments is time. Let’s say Massachusetts enacts a punitive millionaire’s tax: e.g. 20% of all income over $1 million is paid to the state. In the long run, I would expect Massachusetts’ rich to disappear, mostly by moving out of state. But in the short run, they won’t move at all (because these things take time), and the new tax will generate lots of revenue.
So one or two years down the road, proponents of the new tax can point to the fact that the rich are still living in the state, and tax revenues are up. And they will be right: the rich can afford to pay, and they haven’t moved. But ten years later, many rich people will have moved out, taking jobs with them. And no one will remember the punitive tax as the reason why.
Seems that proponets of increased tax project own believes on people that actually count pebbles and call them ‘woodoo’ economics. It is like tribe shaman calls tribe trader a witch.
> (“everyone wants to be in the US” was one response)
We “need” to be in the US, but the cost of doing business there means that we strictly minimise the amount of employment and investment. Any opportunity to create that job in e.g. London instead (not exactly known for being a low-cost city!), we take it.
It’s not just tax, of course. I’d round out the top five with: extraordinarily expensive benefits; endless and complex regulations; the omnipresent threat of litigation; and little stability/predictability in policymaking. If not for those, we’d certainly invest a great deal more in our US operation. As it stands, we avoid it.
“Example: Chicago has offered to let Amazon pocket $1.32 billion in income taxes paid by its own workers. This is truly perverse. Called a personal income-tax diversion, the workers must still pay the full taxes, but instead of the state getting the money to use for schools, roads or whatever, Amazon would get to keep it all instead.
“The result is that workers are, in effect, paying taxes to their boss,” says a report on the practice from Good Jobs First, a think tank critical of many corporate subsidies.”
https://www.seattletimes.com/business/amazon/this-city-hall-brought-to-you-by-amazon/
Even if a state goes full feudal it will not benefit the society at large.