Relevant and even prescient commentary on news, politics and the economy.

Cutting Corporate Rates May Cost Billions

Via Taxprof blog
Wall Street Journal: Tax Twist: At Some Firms, Cutting Corporate Rates May Cost Billions:

What Uncle Sam has given to the earnings of companies like Citigroup, AIG, and Ford he soon might take away.

President Barack Obama has said, most recently during last month’s presidential debates, that the 35% U.S. corporate tax rate should be cut. That would mean lower tax bills for many companies. But it also could prompt large write-downs by Citigroup, AIG, Ford and other companies that hold piles of “deferred tax assets,” or DTAs.
After posting big losses, these companies have tax credits and deductions they can use to defray future tax bills, thus providing a boost to earnings. But a tax-rate reduction means some of those credits and deductions, counted as assets on the balance sheet, would be worth less, since lower tax bills would mean fewer opportunities to use them before they expire. That would force the companies to write down their value, resulting in charges against earnings.


…the company believes tax change should “include transition measures that mitigate impacts and avoid negative unintended results” for companies that based their planning on the current tax system.

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Two Important Op-Ed Pieces Today

I want to draw AB readers’ attention to two of the most important op-ed pieces I’ve read in a while.  They address entirely different, but profoundly important, matters.

One is Elizabeth Warren’s piece today in Politico, called Stop riggingsystem against small business.

The other is Bill Keller’s column today in the New York Times, called The Leak Police.

These articles speak for themselves just fine.  No commentary on them is needed.  

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U.S. Chamber and corporations fighting for low preferential capital gains rates

by Linda Beale

U.S. Chamber and corporations fighting for low preferential capital gains rates

A coalition of the U.S. Chamber of Commerce and large multinational corporations such as Altria Group Inc. and Excel Energy Inc. is trying to pressure Congress to retain the extraordinarily low current tax rates on unearned income that will expire at the end of 2012 without action.

The alliance sponsored a report by Robert Carroll and Gerald Prante of Ernst & Young that develops the idea of an “integrated tax rate on dividends” that includes the taxes paid by the dividend-paying corporation, the federal income taxes paid by the recipient, and the state taxes paid by the recipient. See Carroll & Prante, Corporate Dividend and Capital Gains Taxation: A Comparison of the United States to other developed nations (Feb. 9, 2012), Higher Capital Gains and Dividend Taxes Would Put U.S. Further Behind International Competitors, Alliance press release (Feb. 9, 2012); Richard Rubin, Corporate Coalition Says Obama investment taxes Near World High, Bloomberg.com (Feb. 9, 2012)(republished on the Alliance website). The report claims that the U.S. has an “integrated” rate of 50.8%. The report claims that such a rate “discourages capital investment, particularly in the corporate sector, reducing capital formation and, ultimately, living standards.” Richard Rubin, Corporate Coalition Says Obama Investment Taxes Near World High, Bloomberg.com (Feb. 9, 2012).


Robert Carroll is a former Bush administration official who regularly presents on behalf of corporatism’s Holy Grail of lower corporate taxes, lower dividend rates, and/or change to a territorial tax system for U.S. corporations. See, e.g., Charting a Course for Tax Reform–Moving the U.S. Towards a Territorial Tax System (Jan. 2012); Considerations for a Value-Added Tax (July 26, 2011) (arguing that a VAT-type consumption tax could permit lowering corporate tax rates). Carroll’s VAT article makes the same argument as here–that taxes hurt investment and therefore jobs.

Greater reliance on value-added taxes, or other consumption-type taxes, to fund government can help improve economic performance because consumption taxes do not tax the return to saving and investment. By not taxing the return to saving and investment, these taxes reduce the cost of capital and lead to greater investment. Greater investment means more capital formation, and, ultimately, higher labor productivity and living standards than otherwise. Id.

But these arguments ignore the distributional impact of shifting taxes from corporations and wealthy stock traders to everyday Americans who make 30,000 or 50,000 or 75,000. The drive by the GOP and big corporations to save the wealthy from paying much in taxes shows no concern at all for the fact that the tax burden would be shifted to low-income Americans.
Not surprisingly, the tax rate analysis in this “for hire” E&Y report is highly misleading. Let’s note the reasons, yet again.

  • The report assumes that shareholders bear the full brunt of the corporate income tax. Yet there is no conclusive evidence about the incidence of corporate tax. Many shareholders such as pension funds are tax exempt and pay no tax on the corporate dividends.
  • The report assumes that corporate income is taxed at the federal statutory rate of 35%, whereas in reality the vast majority of corporations pay zero federal income tax and those that pay tax pay an average around 24% effective tax rate (with many lower). Aggressive tax planning, cross-border tax credits, and various deductions (including greatly accelerated depreciation and expensing compared to actual economic wear and tear) allow corporations to reduce their tax liabilities much below the nominal statutory rate. While a chart on page 4 (showing a $100 income amount suffering the 35% corporate rate, an average state corporate rate, a 15% shareholder federal tax and a 4% assumed average shareholder state tax) indicates this is the “top” rate, most of the report discusses this “integrated” rate as though it were the actual rate paid.
  • The report disregards the fact that capital gains are also earned outside of corporations (as Dan Shaviro noted in the Bloomberg piece). It suggests that the corporate level tax will impact “each worker”:

With less capital available for each worker to work with, labor productivity is lowered, which reduces the wages of workers, and ultimately, Americans’ standard of living. Report at 5.
Yet much of the work done in this country is not done for major corporations. There are partnerships and S corporations and sole proprietorships all operating businesses and providing capital gains in appropriate contexts. (And of course most of the capital gains that are being taxed aren’t earned from money that was invested in corporations but rather from corporate stock bought in the secondary market. All this talk about capital for workers is irrelevant to those secondary market trades. See this point below.)

  • The conclusions disregard the fact that investors can defer taxation of capital gains indefinitely by choosing when to sell, and that many gains are never taxed at all over multiple generations, since heirs receive corporate stock (and other assets) with a step-up in basis. (Text accompanying footnote 5 merely mentions that the effective rate “might” be lowered by this fact; the footnote notes that “common practice” for determining the impact would give an integrated tax rate of 43.1%.)
  • Chuck Marr, at the Center on Budget and Policy Priorities, also indicated that “the report also ignores the total tax burden around the world. In 2009, U.S. tax revenue of 24.1 percent of gross domestic product was 9.7 percentage points below the unweighted average of countries in the Organization for Economic Cooperation and Development.” As a result, “the United States is actually a very low-tax country compared to all these other countries.” Richard Rubin, Corporate Coalition Says Obama Investment Taxes Near World High, Bloomberg.com (Feb. 9, 2012).
  • The report purportedly compares top integrated tax rates among the developed countries. But does it really include all the relevant taxes for other countries? It is not clear that the VAT, for example, has been included in countries where a VAT is a significant addition to regular income taxes: the report mentions only corporate income tax rates and dividend tax rates in discussing other countries’ “integrated” rates.
  • The report ignores the fact that there is at best a very slim correlation between the transfer of funds to a business entity for use in running the business and capital gains taxation. Most corporate stock is purchased in the secondary markets, not at IPOs. Most of the gains that are taxed are therefore just accretions in value as corporate stock changes hands from one investor to another. There is no benefit of capital formation for the corporation from the trade–the money goes into the pockets of the one who sells, possibly to be reinvested offshore in an emerging market economy or to purchase the stock of another U.S. MNE.
  • The report assumes that half of any increase in dividend taxes is absorbed into share value but the other half “influences investment decisions”. n.12. This is one of those “anything goes” assumptions that is so annoying about supposedly empirical work that tries to “predict” how behavior will be affected by taxes.
  • The report discusses a “marginal effective tax rate” and suggests that corporate capital will be reduced by that rate, resulting in less expansion and less job creation. But that rate as shown here includes the statutory tax rate on the corporation’s profits and the shareholders’ tax rate on its unearned income from holding corporate stock. Even if one thought that using the statutory rate to discuss corporate tax burdens was reasonable (which I do not), this mingled rate is not the relevant rate that the corporation would consider in determining whether it was profitable and could expand and add on workers or jobs. The corporation may retain its profits and use them to expand or provide working capital, and not pay dividends to shareholders. Many corporations have in fact foregone dividends and instead invested in share buybacks, which give a perceived benefit from reducing the total number of outstanding shares. Interestingly, while the report uses this mingled rate to argue that taxes are bad because it will keep corporations from investing and hiring (pp5-6), it also argues that taxes on unearned income of shareholders from corporations will mean corporations will retain those earnings and “overinvest” in the corporation (p7). Talk about trying to have your pie and eat it too.
  • The argument that fungible investor capital will necessarily flee the country if capital gains rates are allowed to go back to at least the level they were under Clinton, as GOP representative Peter Roskam from Illinois suggests, id., simply misundersands what drives investment decisions and the way our tax system works.
    • Many other factors drive investors to purchase stock, whether in IPOs or in the secondary market, including the stability of a country’s markets, the vigorousness of economic growth, the price-earnings ratios of corporate stocks, the economic outlook for particular industrial sectors, etc.
    • Americans are taxed on their worldwide income, so they don’t avoid the US tax on capital gains unless they expatriate.
  • Taxes are just one factor, and in fact corporate stocks traded quite well when capital gains taxes and dividends taxes were much higher than they are now. Many experts think that removing the preferential rate for capital gains would be the most reasonable way to level the playing field for workers and managers/owners, while raising billions to offset the federal deficit.
  • The distributional effects of very low capital gains tax rates are detrimental. Most of those who benefit from the preferential capital gains are the wealthy who own most of the financial assets, with about 2/3 of the benefit going to millionaires, according to the Tax Policy Center. Id.

Taxes on earned income–salary and wages–are graduated, rising to a maximum of 35% for top income earners. Taxes on unearned income, such as dividends from qualifying corporations or gains from sales of corporate shares, are only 15%. This significant disparity in rates (35% compared to 15%) means that the wealthy who own most of the financial assets and have most of the capital gain income enjoy an extraordinarily preferential tax rate. The result is that wealthy individuals like Mitt Romney can end up paying a significantly lower tax rate than construction workers, firefighters and schoolteachers. That’s unreasonable: the nation would be better served by eliminating the capital gains preference and using those funds to rebuild public infrastructure.

Additional information:
Alliance Statement on Capital Gains and Dividends Tax Provision in the Republican Jobs Committee Proposal (Nov. 2, 2011) (same assertions as in the E&Y report that lowering taxes on unearned income will have wonderful trickle-down effects on the economy)

originally published at ataxingmatter

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CRS reports on repatriation tax holiday impact

by Linda Beale

CRS reports on repatriation tax holiday impact

Shortly before the Christmas holiday, CRS released a report by Donald Marples and Jane Gravelle on the possibility of a second repatriation tax holiday for multinational corporations. Download Marples and Gravelle. tax cuts on repatriation earnings as economic stimulus. an economic analysis. 122011.c

The holiday has been pushed by various commentators who support reducing corporate taxation based on the argument that lower tax, and repatriated earnings, will result in greater investment in domestic business expansion and more US jobs.

Our experience with the 2004 repatriation holiday was not impressive. Much of the repatriated funds were diverted to share buybacks and not used to increase investments or increase jobs. IN fact, many companies that repatriated the most money engaged in heavy firings of workers. Hewlett Packard was notable, with large layoffs accompanying significant repatriated cash.

To repeat that experiment at a time when US companies have even more cash socked away in the US and abroad would merely reward those companies that decided to bet on (and lobby heavily for) a second repatriation holiday that would amount to a huge cut in their taxes–like having the best of a territorial tax system at the same time that they get all the benefits (foreign tax credits, active financing exception, etc.) of the current worldwide tax regime.

The CRS report doesn’t suggest that another repatriation holiday would be a sure-fire economic growth engine. In fact, it notes that it can be counterexpansionary if money is used to address cash-flow problems or to pay out to shareholders.

Viewed in the current debate on how to most efficiently stimulate the economy, economic theory suggests that the simulative effect of a temporary tax cut for repatriations may be offset, or more than offset, by exchange rate adjustments that would reduce net exports.

In addition, how businesses use repatriated earnings will impact the stimulative or contractionary effect of a tax cut for repatriations. For example, repatriated earnings will have a larger stimulative effect, or smaller contractionary effect, the greater the degree to which they are used to increase current investment. A smaller stimulative effect or a larger contractionary effect will result, in contrast, if more of the repatriated earnings are used to shore up “cash-flow” issues or pay dividends.

A repatriation tax holiday is not a good idea. it wasn’t a good idea in 2004. It is not a good idea now. There is no reason to give multinational corporations a tax break to bring money back to this country. They’re cash rich as it is and can make investments if they want to.

originally published at ataxingmatter

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Romney’s Wall St. J. Interview with Gigot–Protecting the Rich

Romney’s Wall St. J. Interview with Gigot–Protecting the Rich

[edited to rephrase and correct typos 12/26/11 5 pm]
Joseph Rago and Paul Gigot interviewed Mitt Romney on his ‘vision’ for America–“On Taxes, ‘Modeling’, and the Vision Thing”, Wall St. J. Dec. 23-24, 2011, at A13.  In it, Romney reveals the way patrician wealth has affected his values, casting President Obama as a “European social democrat” and suggesting that contrasts with his own belief in a “merit-based opportunity society–where people earn their rewards based upon their education, their work, their willingness to take risks and their dreams.”  
Now everybody likes the idea of people being able to advance based on merit, rather than on crony capitalism, improper influence or whatever.   The problem with suggesting that America is a ‘merit-based opportunity society’ is that it isn’t much of one anymore: America in this second Gilded Age is primarily a wealth-and-status-based opportunity society. 
  • Education:  Even Romney admitted (obviously unintentionally) that wealth makes a real difference, since he noted that rewards depend in part on education.  People with wealth receive the finest educations from pre-K through post-graduate, getting preferences at the best children’s academies in Manhattan and at the highest ranked universities like Harvard and Yale.  People without wealth lose out from the very beginning, with inferior schools that are no longer fully supported by the public, as charter and for-profit schools take over offering inferior educations that no patrician family would ever accept.  The poor and middle class take on enormous loans and work loads to finance even their public university educations, since state support has slipped down to a mere 20-30% of the cost of that education.  That makes study and grades and success much more difficult for them. 
  • Working hard (with Contacts/Influence/lobbyists):  The wealthy are introduced early to the most important people of influence in society, like the Vanderbilts and the Astors of old, the private equity fund managers and the Wall Street bankers that can smooth their way through all the trials and tribulations of their ‘work’ careers–i.e., becoming owners of major league baseball team when you have no relevant experience (George W. Bush, with the aid of his papa and his papa’s influential and rich partners) or setting up a venture capital fund (like Romney’s Bain Capital). These connections ultimately permit the wealthy to mingle in a monied society that offers the right contact for every venture to succeed–including lobbyists to help a wealthy entrepreneur get his business going and ability to ‘invest’ in politicians who are willing to risk alienating the middle class to support preferential taxation of the rich. 
    • By the way, lots of the not-rich work quite hard, often at thankless jobs that provide no cushion to deal with life’s difficult blows or at a job that, at minimum wage, still leaves their family below the poverty line.  Without the contacts and influence that smooth the way of the rich, there chances of moving up are much more limited.  If they persevere, have an entrepreneurial idea, and catch a break, they may be able to move beyond where they are, but they have to do a lot more than just ‘work hard.’  
  • Taking Risks (and Getting Subsidies and Preferential Tax Provisions):  The poor take a risk every time they get up in the morning–will their health hold out so they can keep working? will they be able to make it to their job in that car that needs a new starter? can they manage to arrange for someone to take care of their kids while they work or will they have to be “latch-key kids” yet another day?  But they don’t usually have the kind of capital nest-egg to take a risk with in the way that Romney means it–the excitement of opening a new business demands from the poor and near-poor Herculean efforts to pull together family, friends, and workers to support their business ideas.  Those with money, on the other hand, have a head start on all of this.  Bill Gates’ parents offered him an educated life of relative ease; he could ‘play’ in the garage on that dream of his rather than running heavy machinery or working behind a counter at a McDonalds.  And those with contacts and money are able (and willing) to hire the best lobbyists to ensure that they get all the tax-advantaged benefits and subsidies that they can finnangle (or buy) from local, state and federal legislators for their activities.  That includes favorable tax provisions that allow them to keep a significant percentage of their wealth (and to fight for even more favorable provisions), such as the carried interest provision that gave Romney a preferential rate on almost all of his compensation income, the preferential capital gains rate that gives all the wealthy a low tax rate on their income from trading stocks and bonds with each other, and the various ways that the tax code subsidizes the kinds of personal deductions that provide the most benefit to those with money–from the charitable contribution deduction (including the ability to give away stock and claim a deduction for its value rather than for your actual basis) and the mortgage interest deduction (for interest on home loans up to a million plus $100,000) to all of those provisions that allow the wealthy to retire well–pension plans, exclusion of life insurance benefits, etc.  Then there are the many subsidies they get various governments to provide for their businesses, presumably by using those long-term family/status connections to wine, dine and influence.  They include low-cost loans such as those enjoyed by Romney’s Bain Capital for various businesses that Bain Capital was ‘turning around’.  (Handily, they can make low-taxed profits for themselves even when their turnarounds fail, with all those subsidies, so that the taxpayer sometimes ends up paying  for their losses along with the fired workers.)  See the links provided in the posting yesterday on Romney’s reluctance to release his tax returns, which discuss some of the subsidies and other benefits to Romney’s business. 
That’s not a merit-based opportunity society:  it’s an influence-based society, where the poor and even most of the middle class are working against long odds to make headway. 
And there’s not much evidence that Romney recognizes this fundamental difference in existence of the well-off and the not-so-well-off here in America.  Take the Gigot story’s discussion of tax policy and what kinds of “reforms” Romney supports.  The Journal apparently thinks Romney is too timid on ‘risk-taking’ because he didn’t espouse the kind of tax agenda that the Journal supports–moving to a consumption tax–like the national sales tax– that shifts most of the tax burden to ordinary folks (since they will pay tax on most or all of their  income since they spend most of it on food, shelter, clothing and other necessities) and leaves a zero percent tax rate on the capital gains, dividends, and other income from capital that makes up most of the income of the wealthy and little of the income of everybody else.  Why, the Journal notes, Romney’s plan merely calls for extending the Bush tax cuts, cutting the statutory corporate tax rate from 35% to 25%, and eliminating capital gains and dividends taxes only for those who make $200,000 or less.  Romney won’t even say he supports a consumption tax til he’s studied it more, though he likes the purported “simplicity” of a flat tax.    Romney also says he likes “removing the distortion in our tax code for certain classes of investment”.  This means that Romney does not understand the real economics of the consumption tax and the so-called ‘flat tax’, both of which result in taxation of 100% of the income of the poor and near poor and most of the middle class while leaving the rich with a minimal tax burden.  Any system for alleviating that burden (such as a low-level exemption at the bottom of the income scale) would thrust a truly burdensome recordkeeping requirement on those least able to cope with it.  Especially for versions that merely zero out the tax rate on income from capital, distortions would be magnified: the categorization of income into different types is one of the primary distortions in our system, and any plan to eliminate taxes on one type of income while retaining them on another increases distortions rather than removing them!
What about Romney’s saying he won’t propose cuts in individual tax rates for those making more than $200,000?  The Journal seems to think that is rather cowardly, since such a proposal accepts President Obama’s linedrawing on where rate cuts might be reasonable.  Now, aside from the failure to consider dropping the entire bunch of Bush tax cuts and letting all the rates go back to the level that they were when Bush took office (which might well be the best tax reform the Congress could do at this point), Romney should be commended for at least recognizing that the wealthy have gotten a fistful of tax gifts from the Bush individual tax cuts (and, indirectly, from the various corporate tax provisions that have allowed companies to pay less and less into the federal fisc) and for not wanting to proffer even more. 
But here’s the rub.  Romney doesn’t recognize the damage from the wealthier among us continuing to get even wealthier while the vast majority suffers stagnation and decline:  as the concentration of income increases at the top and inequality becomes the defining characteristic of this society, opportunity for all is threatened as is democracy itself.  Tax policies that could serve as a deterrent to that wealth buildup at the top–e.g., a stiffer, progressive estate tax, a financial transactions tax to discourage trading and capture a tiny amount in connection with those secondary market trades amongst the wealthy, and bracket expansions that would create a more progressive set of tax rates for the highest income that would distinguish between those who have $400,000 a year and those who have $2 million a year–aren’t even on Romney’s radar screen.  He’s content with the current system’s distribution, one that is highly favorable to the wealthy.  As a recent FED Finance and Economics Discussion Series article made clear, inequality has made permanent inroads and tax policies haven’t done much to dampen them.  See Jason DeBacker et al, Rising Inequality, Transitory or Permanent? New Evidence from a U.S. Panel of Household Income 1987-2006.
Romeny’s made it clear that he isn’t about to challenge the status quo of an easy tax life for the wealthy.  Here’s what he said to the Journal on the question of making sure that the wealthy never see any kind of a tax increase.
“My intent is to simplify our tax code and create growth, and so I will also look to see whether the top one-half of 1% or one-thousandth of 1% or top 1% are still paying roughly the same share of the total tax burden that they have today.  I’m not looking to lower the share paid for by the top.”  Wall St. J., Dec. 24-25, 2011, at A13 (quoting Romney).
So after a decade of cutting taxes on the wealthy and passing more and more provisions that benefit the wealthy in particular either directly or indirectly, Romney declares today’s status quo as the perfect state for things to be in–the current low taxes on the wealthy, in perpetuity, are his goal.  And while we may applaud him for not intending to lower taxeds further on the wealthy, it is hard to see how continuing current tax policy towards the wealthy makes sense for the fisc or for democracy.   Carried interest–won’t be taxed under Romney as the ordinary compensation that it is.  Mortgage interest deduction on million-dollar loans–won’t be pulled back to a more reasonable amount such as the interest on a loan that is 80% of the value of the median-priced US home.  Charitable contribution deduction for value rather than basis in stocks contributed–won’t get rid of that one.  Establishment of new brackets to recognize the drastic expansion of incomes at the top so that those with progressively more income are paying progressively more in taxes–won’t happen under Romney.  Why?  Because he is going to make sure that the top 1%, the top 1/2%, the top 1/1000% don’t pay less, but also don’t pay a bit more in taxes than they are paying now, this perfect state where the GOP wants to cut people off Medicaid to save money, turn Medicare into a ‘premium support’ system that will shift more and more of the burden of health care in one’s old age to the vulnerable elderly with a pension they can’t count on and a Social Security system that the GOP is trying to ensure that they can’t count on.
Most tax “simplification” promoted by lobbyists won’t create growth–it is much more likely to result in tax loopholes that the wealthy can drive a truck through.  Refusing ever to increase taxes, even on the ultra-rich who can clearly afford to pay more (without really noticing the difference in spending power) won’t create growth–it most likely will result in a stagnant economy where the burdened middle class gradually falls into the ranks of the New Poor. 

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The Corporations That Occupy Congress

The Corporations That Occupy Congress

 by David Cay Johnston via taxprofblog and Reuters

Some of the biggest companies in the United States have been firing workers and in some cases lobbying for rules that depress wages at the very time that jobs are needed, pay is low, and the federal budget suffers from a lack of revenue.
Last month Citizens for Tax Justice and an affiliate issued Corporate Taxpayers and Corporate Tax Dodgers 2008-10. It showed that 30 brand-name companies paid a federal income tax rate of minus 6.7% on $160 billion of profit from 2008 through 2010 compared to a going corporate tax rate of 35%. All but one of those 30 companies reported lobbying expenses in Washington. Another report, by Public Campaign, shows that 29 of those companies spent nearly half a billion dollars over those three years lobbying in Washington for laws and rules that favor their interests. … The report – “For Hire: Lobbyists or the 99 percent” – says that while shedding jobs, the 30 companies are “spending millions of dollars on Washington lobbyists to stave off higher taxes or regulations.”
….
Company reports to shareholders show that among the 30 companies in the Public Campaign report, the 10 firms that spent the most on lobbying during the same three-year period fired more than 93,000 American workers. …

Worth reading the whole piece.

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Nader Argues for a Financial Transactions Tax

by Linda Beale

Nader Argues for a Financial Transactions Tax

Ralph Nader provided an op-ed on the question of a financial transaction tax, “Time for a Tax on Speculation,” Wall St. Journal, A17 (Nov. 2, 2011).  He ties the need for the tax as a curb to speculation to the growing concern among ordinary Americans about corporate power and Wall Street excesses.

A financial transactions tax would impose a small charge on the value of stock, bond and derivatives transactions–probably somewhere around 0.25% to 0.5% (the latter is the figure pushed by Nader and groups like National Nurses United). Such a tax would raise a considerable amount of money and at the same time serve another important function–curbing speculative and high-frequency trading.

[This tax] has the potential to curb risky speculative trading that contributes little real economic value.  The Capital Institute’s John Fullerton has stated that a financial speculation tax could have a significant impact on the high-frequency trading and other ‘quant’ trading strategies that now comprise an astonishing 70% of vastly bloated equity-trading volume.  Over the past few decades, trading volume has grown exponentially.  In 1995, the total shares of stock traded on the Nasdaq and the NYSE, not including derivates and other options, was 188 billion.  By the peak of the financial crisis, in 2008, this annual number had skyrocketed to three trillion.

*** Sen. Harkin, Rep. DeFazio and others in the past few years have proposed protecting ordinary investors from the direct effects of the tax by providing exemptions for mutual funds, retirement funds and for the first $100,000 in trades made annually by an individual

originally published at ataxingmatter

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CORPORATE TAXES AND INVESTMENT

Yesterday in the New York Times Greg Mankiw — a professor of economics at Harvard, an advisor to the governor of Massachusetts, in the campaign for the Republican presidential nomination and a former Chairman of the Council of Economic Advisers under president Bush — had a column in which he argued that a cut in the corporate tax rate would induce greater investment. This is a key premise of Republican campaigns that has driven Republican policy since the early 1980s. The article is here.

We should look at the record and see how well such cuts to corporate taxes actually has worked.

First, average corporate profits versus tax business pays. Contrary to the statutory rate of 39% widely quoted, the effective rate corporations actually pay is now about 22%. That is down from about 50% in 1950 and a local peak of some 44% in the early 1980s. The right likes to compare the statutory rate to other advanced countries statutory rate and claim that the US has about the highest corporate tax among advanced countries. But according to a recent study by the US Treasury the US effective rate is in about the middle of the pack of effective rates for advanced countries.

Second, let’s look at after tax profits as a percent of GDP. Despite cyclical swing there has been a strong secular trend since 1950. From 1950 to the early 1980s taxes as a percent of GDP declined from about 10% of GDP to under 4%. Since 1980 it has rebounded from under 4% back to about 10% of GDP and this measure appears to be on the verge of breaking out to a new record high.

Next look at business investment as a share of GDP . Again, despite cyclical swings there appears to be a secular trend. From 1950 to 1981 it rose and reached an all time peak of 14% in the early 1980s. Since 1980 it has been trending down from 14% and is now back to about the 10% level it was at in 1950.

…and compare it to taxes as a percent of GDP. Note the secular swing in investment is the exact opposite of the secular trend in profits. From 1950 to 1980 profits fell and investment rose. Since 1980 profits rose and investment fell. This is the exact opposite of Mankiw’s theory that cutting corporate taxes will lead to higher investments.

Mankiw writes a column for the NY Times every few weeks. Maybe in his next column he can explain why we should ignore this evidence that directly contradicts his theory.

His theory appears to be like the supply side theory that if we cut personal taxes on savings that people will save more. Since 1980 we have created IRA and other instruments that allow consumers to save on a tax free basis and increase their returns. So what happened to the personal savings rate over this period, it fell from 14% to almost 0%. This has to be about the greatest failure of an economic theory since communism. Remember, Milton Friedman said the most important test of a theory is how its forecasts work. Using Friedman’s basis the supply side theory about personal savings was a abject failure.

Now, I’m going to surprise you by saying that I completely agree with Mankiw that corporate profits taxes should be cut. But of course there is a catch.

What I want corporations to pay taxes on is their profits as defined by the Generally Accepted Accounting Procedures (GAAP) rather than profits as defined by the IRS. Congress does not establish GAAP so this change would massively cut the ability of Congress to create loopholes or special cases in the tax code. As a consequence incentives for firms to buy-off politicians would be massively reduced. If you are a corporate CEO would rather use the money you now have to spend on Washington lobbyist and expensive tax lawyers to actually expand your business. My primary objective is to reduce the power of corporate money in politics and if Mankiw is right that it increases investment all the better.

Almost to a man Republican and business leaders strongly agree that the US should not have industrial planning. Politicians should not be in the business of picking winner and losers. But the US has a major industrial planning system, it is just that we call it the federal tax code. And generally the critics are right, Washington does a poor job of picking winners and losers.

According to the GAO the industries with the highest effective tax rates like information technology are frequently the fastest growing industries. Moreover the slowest growing industries, like oil, have the lowest effective tax rate. The GAO estimate that the oil industries’ effective tax rate is about 11%, or about half the overall corporate tax rate.

Apparently oil executives learned decades ago that the get a much higher return on their capital if they use it to buy political favors rather that actually drilling for more oil. Surprisingly, domestic oil production actually rose in 2009 and 2010. This is the first consecutive annual increase in domestic oil production since Carter was president and oil faced price controls and windfall profits taxes. Maybe the oil executives realized they could not buy-off Obama and decided that to grow profits they had to do something really radical, like increasing domestic oil production.

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A tax thought…A Modest Tax Proposal

by Tom aka Rusty Rustbelt

A Modest Tax Proposal

The GOP is all breathless about deficits, but this is the same GOP of Dubya Bush that fought a war in Iraq (unnecessary) and Afghanistan (overextended) funded entirely by debt.

So, the following proposal.

A 3% surtax on taxable incomes over $75,000 until the cost of both wars is paid.

This level of tax should not slow the economy, and we should face up to the responsibilities of having troops in the field.

Your thoughts?

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