The Winner!

On April 1st of this year, 2012, the United States became the winner. We now have the highest corporate tax rate of all of the developed countries. On April 1st, Japan actually lowered their top rate leaving our 35% rate as the highest.

Well, we are angry at Wall Street and corporate America by implication, so this is OK, right?

But wait, over and over again the press tells us that many large companies do not pay 35% in taxes. A recent study done by the Citizens for Tax Justice, a supposedly left leaning advocacy group, found that 280 of the biggest companies in the US paid less than 18% in taxes, far below the statutory 35%. Fully twenty-five percent of these companies (data used was the companies’ own financials) paid less than 10%. For the reviewed three year period thirty companies paid no federal tax at all… for all three years.

Now, there were a quarter of the companies that did pay the 35%. I can hear the tax planning departments and the lobbyists for the savvier firms laughing and hooting.

How can this be?

Lobbyists

No, you won’t find anything like this Amsterdam red light district on K street in Washington, DC, except in how the lobbying firms that live there operate.

There are a lot of reasons that the number of lobbyists on Capital Hill has increased by more than 100% since 2000. One reason is that these folks work on favorable legislation to reduce their benefactor’s tax liabilities.

Sure, they do a lot of other “influencing” but we are only looking at one wart at a time. Shelters, loopholes, and all kinds of other finagles negotiated by these folks with the government folks, your congresspersons, give the corporation tax lawyers plenty of ways to manipulate their federal tax bill.

Because of these activities, most companies tax rate is not 35% as noted above.  So what is the problem with the 35% and being the developed country with the highest tax rate?

The Problem

Corporate tax “planning” starts with that number. One of the responses is to set loose the hoards from the lobbying companies. Other responses include lots of “planning” on just how the accounting rules apply to their tax liabilities and how they can be structured to lower these liabilities.

All of this activity is not productive (no more widgets out the door) except in the, valid, preservation of capital activity which, admittedly, can produce more widgets later.

I would note that the marginal cost of the planning activity needs to be factored into the widget’s cost.

These activities are complicated for many of these big firms by their international operations and the complex web of tax rules all around the planet. The highest tax rate makes US firms less price competitive in the global marketplace they say. Makes sense, what else to do with that expense except pass it on.

Clearly, lower tax rates in countries other than the US have influenced a considerable amount of job off shoring and facility location outside the US. Just ask folks who used to work in US manufacturing of clothes, shoes, electronics, etc., and a whole lot of Information Technology folks.

Other indicators of shifting international sands include:

  • Today, there is a three times greater investment from the US in foreign firms vs. domestic firms
  • in 1985 ten of the top thirteen international firms were based in the US; today, six.

There are other factors in offshoring decisions, like the fearsome amount of regulation in the US, and the real cost of off shore resources, but, again, those are topics for another day (see elsewhere in this blog).

Lobbyists also do other things to further complicate the situation. They work to influence, even at times create, trade agreements, tariffs, etc.

More shenanigans, more manipulations.

Small Companies

How about the smaller companies? How about what is supposed to be the engine of our economy, the very small companies? Sixty-five percent of new jobs come from these businesses. Because of the vastly complex tax structures, these folks often elect corporate organizational forms that allow them to flow the profits or losses from their companies through to their personal tax returns to pay a lower rate and to preserve capital.

This becomes one of the major fallacies of a “tax the rich” approach. One of these companies having profits of $250,000 now makes its owner look rich, a tax target, when that money is most likely going to be reinvested in the company helping it to grow and employ more folks.

Paul Ryan

We’re in a global economy. Where I come from, when we say “overseas” we mean over Lake Superior — Canada, which just dropped its business tax to 15 percent. How on Earth are our businesses going to be able to compete with the Canadians — or the Irish at 12.5 percent? Since Japan just cut its corporate tax rate, the United States now has the “honor” of having the highest tax rate in the world. If we tax our job-creators at such higher rates than our competitors are taxing their companies — then we lose and they win.

Paul Ryan, From Remarks at the NY Historical Society

Now I can hear the chuckles from some at the mention of Paul Ryan.

What sticks in my mind is the current Secretary of the US Treasury, Timothy Geithner’s comment on Ryan’s work as head of the House Budget Committee, “We’re not suggesting we have a solution to the long-term fiscal problem. What we do know is, we don’t like yours.”

And now…

I was/am a huge Monte Python fan and I believe that it is now time for something completely different.

Many laughed at the expense of Herman Cain’s 9-9-9 plan. My reaction was that while it seemed to need a bit more work, it was bold and courageous to suggest this amount of change.

For years Steve Forbes has been suggesting a flat tax. Some folks have put forth a “fair” tax version with a similar vision for simplicity and fairness.

Incrementalism is not going to work anymore. As we heap regulation on regulation trying to fix one with the next, all we accomplish is job security for all the regulators and mass confusion and cost for the regulated.

In 1986 President Reagan tried to “simplify” the tax code and actually did, a bit. Today, like a chronic dieter, the fat is back and in greater quantities than when Reagan started.

Now is the time for big ideas and the great courage needed to adopt them.

End the gimmicks and loopholes, the crazy subsidies, the amazing interference in commerce, the idea that a government functionary can figure out a hugely complex system and then fix it with a tax code or some other manipulation. Put in place something eminently simple and reasonably consistent for all. I hesitate to say fair. That, I suspect, is a condition that is impossible to reach considering the great variety of perceptions as to just what it means.

Success metrics? When we look on K Street in Washington DC and there are no shingles for lobbying firms, when the tax accountant profession has pretty much disappeared, when the IRS is about one one hundredth of its current size, we will be well on our way.

Can our current system of governance accomplish this?

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