This is an issue that I've thought about for a few months now, and until now, I haven't seen it discussed in the media. The article's main point is that the corporate income tax makes the US poorer because it incentivizes outsourcing. Move jobs and capital overseas and companies avoid the high marginal rate. Eliminate the incentive and those operations will come back, in fact the incentives will work the other way as foreign companies might move operations here to avoid taxes in their own countries.January 5, 2014
Abolish the Corporate Income Tax
By LAURENCE J. KOTLIKOFF
BOSTON — JOBS don’t grow out of thin air, especially well-paying ones. They require, among other things, companies that are willing to operate where you live. Just ask the Seattle-based District 751 of the machinists’ union, which was worried that Boeing will build its new 777X airliner someplace far away where it is cheaper to produce. Last month the union offered contract concessions, as its president explained, to ensure “the long-term success” of Boeing in Washington State. And on Friday, Boeing machinists approved a contract with concessions to keep assembly of the plane in the area.
In recent decades, American workers have suffered one body blow after another: the decline in manufacturing, foreign competition, outsourcing, the Great Recession and smart machines that replace people everywhere you look. Amazon and Google are in a horse race to see how many humans they can put out of work with self-guided delivery drones and driverless cars. You wonder who will be left with incomes to buy what these robots deliver.
What can workers do to mitigate their plight? One useful step would be to lobby to eliminate the corporate income tax.
That might sound like a giveaway to the rich. It’s not. The rich, including Boeing’s stockholders, can take their companies and run — and not just from Washington State to, say, North Carolina. To avoid our federal corporate tax, they can, and often do, move their operations and jobs abroad. Apple’s tax return says it all: The company, according to one calculation, paid only 8.2 percent of its worldwide profits in United States corporate income taxes, thanks to piling up most of its profits and locating far too many of its operations overseas.
I, like many economists, suspect that our corporate income tax is economically self-defeating — hurting workers, not capitalists, and collecting precious little revenue to boot.
The United States may well have the highest effective marginal corporate income tax rate of any developed country. Jack Mintz, a public finance economist and director of the School of Public Policy at the University of Calgary, puts the rate close to 35 percent, which is also the statutory rate. Other economists, using different techniques, calculate the marginal rate to be as low as 23 percent. But both figures are miles above zero.
They are also miles above our 13 percent average corporate income tax rate — the ratio of corporate taxes to total corporate profits. The fact that the marginal tax rate, whether 23 percent, 35 percent or somewhere in between, is so much larger than the average rate suggests that a sizable share of corporate profits and production is ending up overseas and untaxed.
Making, rather than just stating, this case requires constructing a large-scale computer simulation model of the United States economy as it interacts over time with other nations’ economies, and then seeing how the model reacts when you change the American corporate income tax. I’ve developed such a model with three colleagues through the Tax Analysis Center, a nonpartisan research group. Our findings make a very strong, worker-based case for corporate tax reform.
In the model, eliminating the United States’ corporate income tax produces rapid and dramatic increases in American investment, output and real wages, making the tax cut self-financing to a significant extent. Somewhat smaller gains arise from revenue-neutral corporate tax base broadening, specifically cutting the corporate tax rate to 9 percent and eliminating all corporate tax loopholes. Both policies generate welfare gains for all generations in the United States, but particularly for young and future workers. Moreover, all Americans can benefit, though by less, if foreign countries also cut their corporate tax rates.
The size of the potential economic and welfare gains are stunningly large and don’t reflect any extreme supply-side (a k a, voodoo economics) assumptions. Fully eliminating the corporate income tax and replacing any loss in revenues with somewhat higher personal income tax rates leads to a huge short-run inflow of capital, raising the United States’ capital stock (machines and buildings) by 23 percent, output by 8 percent and the real wages of unskilled and skilled workers by 12 percent. Lowering the corporate rate tax to 9 percent while also closing loopholes is roughly revenue neutral and also produces very rapid increases in capital (by 17 percent), output (by 6 percent) and real wages (by 8 percent).
Eliminating the corporate tax and raising income tax rates or lowering the corporate tax rate and eliminating its loopholes are not the only options. Elsewhere, I have proposed eliminating the corporate income tax, but making shareholders pay income taxes on their companies’ profits as they accrue. This leaves companies with no tax reason to avoid operating in the United States but ensures that shareholders, not wage earners, make up for any revenue losses through higher personal tax payments.
It’s been a long time since the typical American worker received a raise in her real pay. In fact, average weekly earnings, exclusive of fringe benefits but adjusted for inflation, are 10 percent lower today than they were in 1966. This is America’s nightmare, not its dream. Turning things around requires getting a lot of things right, starting, I’d argue, with corporate tax reform.
Laurence J. Kotlikoff, a professor of economics at Boston University, is the author, with Scott Burns, of “The Clash of Generations: Saving Ourselves, Our Kids, and Our Economy.”
This is all well and good and I can't find a flaw in the reasoning, but it begs the question: If eliminating corporate taxes is so good for the domestic laborer, why do Democrats never suggest it? If eliminating taxes on big business is such good policy, why don't pro-corporate Republicans propose it?
I have become convinced that the reason is that the largest corporations in America like the fact that we have the world's highest marginal rate. Our current corporate tax system stacks the deck in favor of giant, established businesses that would go out of business or at least take lower profits in a properly functioning capitalist system. Consider this: You own a medium or large (but not giant) company that makes a product far superior to one that General Electric makes. It is superior in every way and cheaper to manufacture, your organization is more nimble and efficient, and your advertising and distribution is more effective. However, because you cannot afford to hire armies of lawyers and accountants to take advantage of every conceivable tax loophole or run your revenues through multiple tax havens, you pay close to the full 35% tax rate, while GE pays roughly 6%. This 29% gap means that you lose, no matter what. You go out of business, and the incumbent stays at the top. Meanwhile, due to lack of competitive pressure, the pace of technological advancement slows, resources are misallocated, there are fewer domestic jobs (which over a long period of time causes permanent loss of skills in that industry, reducing the country's economic output forever), and ultimately both higher inequality and lower overall wealth. The only winners in this situation are the stagnant organizations that can afford to contribute heavily to political campaigns, and who earned that wealth by (many years ago) being exactly the sort of savvy, upstart companies that are now denied the opportunity to compete.
Am I wrong, here? If so, please tell me how. If not, this is something that we should all be talking about, since eliminating corporate income tax is something people on the political left and right could both get behind once educated about the ramifications.
