Friday, April 15, 2016

Leaders on Corporate Taxes: Misleading or Misinformed

Though I don't assume Sen. Bernie Sanders will be the Democratic Party nominee for president, I do assume the next president will respond to populist outrage against corporations (especially those in the financial sector). As a result of this populism on the left and right (Tea Party and Occupy having the same vitriol for Crony Capitalism), there is little hope for meaningful corporate tax reform.

Ignorance (or feigned ignorance) on issues of economics seems to underpin the campaigns of all four leading candidates as we enter the "home stretch" of primaries. From Donald Trump swearing to raise taxes to 30 percent on companies that leave the United States to Bernie Sanders claiming that we must shift the tax burden (income taxes are already progressive, the "burden" tends to be sales and other local or state taxes that do penalize the poor, not income tax).

The United States needs tax reform, of both the personal (household) income tax system and the corporate earnings tax system. Both need to simplified, condensed, and made more equitable by favoring only those struggling in the truest sense. Though this post focuses on corporate taxes, I want to point out the obvious: the home mortgage deduction and other middle-class favorites have equivalents in business. You cannot argue for equity while taking advantage of your own special interest deductions and loopholes.
Elizabeth Warren's Tax Warning
She orders Democrats not to make the U.S. tax code more competitive.

The Wall Street Journal
Nov. 20, 2015 6:26 p.m. ET

Sen. Elizabeth Warren (D., Mass.) … says the problem with the U.S. corporate tax code is "not that taxes are far too high" but that "the revenue generated from corporate taxes is far too low." She points out that while the U.S. federal rate on corporate income is 35%, the average effective tax rate that U.S. companies actually pay, after various deductions, exemptions and credits, is 20%.
Okay, Senator Warren, if the rate isn't the problem, clearly the deductions and loopholes are the problem. Close the loopholes, end the deductions, and then lower the rates to be more competitive, especially for small and mid-sized companies without armies of tax lawyers.

Also, I'm never one to argue that revenues in the United States are too low. They are not too low. We spend too much and we spend in idiotic ways. The budget process makes ending bad programs or programs no longer needed nearly impossible. We should spend more on infrastructure. We should spend less on defense. Our priorities are wrong, not our tax revenues.

Faced with stupid tax laws, many businesses keep foreign revenues abroad. This is a logical move. If I make widgets for Europe in Europe, why not keep the revenues there as well? Then, any need for expansion, research, marketing, and so on is funded by income from that region. The notion that a company somehow owes the United States everything, no matter where it is manufacturing and selling goods, is absurd.

Also, many smaller companies no longer go public. Going public is expensive thanks to Dodd-Frank and other regulatory hurdles. Just stay private. Don't form a corporation at all, if you can avoid it as a small company.
Ms. Warren… tries to steal a base by claiming that over the years corporations have been paying a smaller and smaller share of federal taxes. This is true, but as Kyle Pomerleau of the Tax Foundation notes, "the underlying reason is not tax avoidance. The reason is that there are fewer corporations. For the past few decades the number of pass-through businesses have greatly increased in number." These businesses pay through the individual income tax code. Their taxes are no longer counted as corporate tax revenue.
The Massachusetts Senator also says that most of the developed countries in the OECD collect "higher corporate tax revenues as a share of GDP than we do." Since they all have lower rates, shouldn't that tell her something?
Senators Warren, Sanders, Cruz, and former Senator Clinton all like to complain about companies trying to merge with foreign partners, allowing these corporations to move their legal residency abroad. Donald Trump is also upset with these tax inversions. First question: What have you done as senators to simplify taxes and encourage companies to move to the United States from other nations? Oh, that's right. Nothing. You've done nothing but use the issue as a campaign slogan.

You want companies to stay in the United States? You want other companies to relocate here? Make the United States more competitive. We're actually less free economically than many European and Asian nations, which manage to be "democratic socialists" with fewer regulations. How in the world did that happen?

Those of you stuck in the Senate after this election, do something positive. Work with the House to simplify taxes and close loopholes. End deductions. Make it clear to any adult able to read and perform basic math how much a company owes in taxes. It shouldn't take an army of lawyers to comply with federal tax law.
"Right now U.S. companies can pay a lower rate by investing overseas instead of in the U.S.," said Ms. Warren…. That is exactly the problem. And tax reform to make U.S. rates competitive in a simplified system that doesn't favor the corporations with the best lobbyists is the solution. 
But don't expect Sen. Warren to propose anything like that. It would require moving too much power out of Washington. As the heartthrob of progressives, she expects her remarks to be ideological marching orders to Senate Democrats and Hillary Clinton. In attacking even the chance of reform, she is endorsing corporate inversions and the movement of American jobs and capital overseas.
The Wall Street Journal is correct, though. Nothing is going to change. That would make too much sense and take away a great campaign speech talking point.