21 March 2012

The Wrong Debate

This time focused on the corporate tax:

Corporate tax reform is not usually a major issue in a presidential campaign, but it may be this year. President Obama has introduced a bold framework for a business tax overhaul.
His framework is already under attack from both the left and the right, indicating that the president has found a sensible middle position from which to start the debate — a debate worth having. Corporate taxes are a significant determinant of investment, innovation, job opportunities and growth.
When Japan cuts its corporate tax rate this year, the United States will have the highest statutory corporate tax rate of the developed countries. Even after incorporating various deductions, credits and other tax-reducing provisions in the tax code, the effective marginal corporate tax rate in the United States — the one that corporations actually pay on new investments — remains one of the highest in the world.

I’ve written on corporate taxation before, but I think my general point bears repeating:  it’s best to just eliminate the corporate tax altogether.  It doesn’t provide that much revenue, relatively speaking, and it imposes massive compliance costs, especially in light of the complexity of corporate tax law.  It deprives workers of jobs and reduces, and hurts the economy overall because so much labor is required to obey corporate tax laws (think of how man accountants and lawyers would be out of work if there were no corporate taxes; that’s how much systemic waste the government is currently imposing).

Yes, I know we need to increase tax revenue in order to be more fiscally responsible, but there is no reason to think that increasing the complexity of the current tax system will help attain this goal, nor is there any reason to think that taxes can be raised indefinitely.  Yes, the federal government is facing a lot of fiscal shortcomings.  However, it is obvious that the only real solution to the current fiscal problems is cutting spending.  Raising taxes anywhere and everywhere has the potential to provide some help, but the root problem is that the federal government is pending more than it can ever realistically hope to take in.

As such, the focus on tweaking corporate tax policy and retaining ridiculously high rates is simply absurd.  There is so little to be gained from high having corporate rates, and so much to lose, that it seems absurd that debate over corporate taxation is centered how high rates should be instead of whether corporate taxes should be levied in the first place.

In the free market, corporations wouldn’t exist.  In the real world they do.  But there is no reason to be stupid about having this market distortion, and there is thus no reason to tax it.  All corporate taxes do, when conjoined with the policy of free trade, is encourage businesses to locate elsewhere, depriving workers of jobs and reducing wages.  And the only received in return is a pittance in tax money, which makes such a small amount of federal revenue that it seems simply absurd to even suggest continuing the levy the corporate tax.

Notes:  My analysis is based on the most recent set of complete data, which is for fiscal year 2010.  In 2010, the federal government spent $3.721 trillion, and collected $2.165 trillion in taxes (source).  Corporate taxes accounted for 9% of tax revenues (source), for a total of approximately $195 billion, which is roughly 5% of the federal budget.  If the corporate tax were eliminated, revenue could easily be regained by some combination of raising income tax rates, closing income tax loopholes, or eliminating income tax credits.  Additionally, eliminating the corporate tax would encourage more corporations to locate domestically and hire more domestic workers, which would expand the income tax base.

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