I predict future happiness for Americans if they can prevent the government from wasting the labors of the people under the pretense of taking care of them.- Thomas Jefferson.

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Friday, June 4, 2010

Corporate taxation is a very complicated and sticky issue, made more complicated by obcure and overly-complicated tax codes. The US has one of the highest, if not the highest corporate tax rates in the developed world. (I heard that somewhere, but after a little research, I'm not so sure.)

from the CBO-

How effective marginal corporate tax rates in the United States compare with other countries’ rates depends on the type of corporate investment being made and the way in which it is financed. Corporateinvestments are financed by either shareholders or lenders (which include corporate bondholders). Compared with the average effective marginal corporate tax rates for shareholder-financed investment in machinery among all other OECD countries, the United States’ rate is slightly higher; compared with the average among other G7 countries, the United States’ rate is about the same. Compared with the average rate for shareholder-financed investment in industrial structures among all other OECD countries, the United States’ rate is significantly higher; however, the United States’ rate is close to the average among other G7 countries. In contrast to rates for shareholder-financed investment, the United States’ effective marginal corporate tax rate for lender-financed investment in machinery is low by comparison with the average for other OECD countries and for other G7 countries.

From an international perspective, although the United States’ effective marginal corporate rates for shareholder-financed investments are higher than the average, such rates for investments financed by a combination of shareholders and lenders may be lower than the average if a sufficient fraction of the marginal investment is financed by lenders.

The history of corporate tax rates between 1982 and 2003 suggests that countries do not change their corporate tax rates independent of one another. After large reductions in statutory corporate tax rates by Ireland, the United Kingdom, and the United States in the mid-1980s, other OECD countries also cut their rates, perhaps out of concern that they would lose investments or part of their tax base—for example, when corporations moved their operations to a lower-tax country. Hence, the corporate tax rates that the United States establishes may affect the choices that other countries make about rates. Thus, how the United States’ corporate tax rate ranks in relation to the rates in other countries is not determined by U.S. policy choices alone.
Typical economic Gobble-de-Gook, how about a little more-

The domestic distortions that the corporate income tax induces are large compared with the revenues that the tax generates. That finding is independent of how the United States’ corporate income tax compares with the taxes imposed by other countries. The corporate income tax in the United States generates a variety of domestic economic distortions that may have little relationship to what other countries do with their corporate income taxes. Those domestic distortions bring about reductions in economic efficiency that researchers estimate are large relative to the amount of revenues that arecollected. Reforms to the tax system that reduced those distortions would not depend on how the United States’ corporate tax rate ranked in relation to the rates of other countries. Differences among countries in their corporate income tax structures distort incentives for locating investments and create additional opportunities for tax planning. In addition to distorting firms’ decisions about domestic investment, corporate income taxes may distort their international economic decisions. Costs to efficiency may arise because countries impose varying tax rates on corporate income, which may influence where and for what purpose a corporation chooses to invest. Those differential rates may distort the international allocation of investment and cause businesses to engage in additional costly international tax planning. 

                            end of CBO quote

What this says to me, is that tax policies in general, result in more harm to business, than the revenue they generate. The inefficiencies in the tax code (not just in the US) are wasteful, and ultimately harm all of us. We are all consumers who rely on private business to supply our daily needs. No matter what your criticisms of the corporate world, we need their products. Remember, corporations can not survive w/o profits, profit should not be a dirty word. Increases in corporate taxes will simply be passed along to the consumer, resulting in rising prices.

OTOH, large corporations should not get special favors from govt either (fascism), which is clearly happening right now. The cry of "Double taxation", that corporate taxes have already been paid, why should dividends be taxed as well is a legimate argument.

Do I have a solution you ask (assuming you're still reading and haven't switched your setting to ignore this user)?

1. Most Important and possibly easiest- Simplify tax codes. A simple "bad" tax code may be better than a complicated "good" tax code. No targeted taxes.

2. How about NO corporate taxes. Tax income, dividends, and capital gains of employees, stockholders, and owners equally. Isn't that fair?

3. Sales tax, (VAT tax?). I'm not sure about these taxes. Regressive in nature, but to some extent act as contractual insurance, funding the civil court system to adjudicate transactional disputes

4. Reduce regulatory burdens. Most regulations end up favoring large businesses, stifling competition that would lead to innovation and lower prices. Most govt regulations drive up costs w few benefits. The financial and banking system is an exception to this rule, as they have an unfair advantage by virtue of the fiat monetary system currently in place, but that topic deserves its own separate essay

5.  Cut govt spending.  There is nothing that the the govt does, that couldn't be done better, cheaper and more efficiently in the private sector.  I know I'll get plenty of argument re: infrastructure, but I'm trying to keep this simple.  There is no such thing as an efficiently spent dollar in the govt sector.

6.  Consistent, but low tariffs.  I believe tarriffs were how the founding fathers intended to pay the fed govt bills. I am against targeted, punitive, or protectionist tarriffs as they harm the individual US consumer. If Canada can provide lumbar at a lower cost than US manufacturers, even after a resasonable tarriff, I should not have to subsidize the US lumbar industry or lumbarjack unions, and pay more for housing and whatever else lumbar is used for. I might make minor concessions to certain industries re National security, such as the steel industry, although they have really overplayed that card in the past. If Korean steelmakers are being subsidized by their govt, and dumping low cost steel into our markets, I say BUY it. Their govt is harming every other Korean industry and all of the Korean people (other than those who work in the steel industry), WHY SHOULDN'T THE MAJORITY OF THE AMERICAN PEOPLE BENEFIT FROM THE Korean govt's folly.

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