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.
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- 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
“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.”
Sigh.
In the US system the dividends are subject to the corporate income tax *before* they are paid to the tax exempt pension funds. That’s actually what the whole darn argument is about.
Secondly, we’ve two places where the incidence of the corporate income tax could fall. Upon the shareholders or the workers. Arguing that the shareholders are not bearing all of that incidence is arguing that the workers are carrying more of it.
Which really doesn’t support the other part of your argument, that if we don’t tax shareholders then workers will have to pick up more of the burden.
Tim
I assume you are a shareholder. You could sell your high taxed shares and get a real job.
Opressed so hard, they could not stand
Let my people go
What these folk are suffering from is percent paresis. They are awash in cash, but cry about the percent that has to go to the gummint to keep the money machine working.
So, I’ll tell you again,
if i am a dirt farmer making, say 10k off my dirt farm, and a well dressed stranger comes in and offers me a bag of magic seeds that he says will increase my moneycrop ten fold, and I say, well, stranger, sounds good, but what will these seeds cost me… and he says… well, i’ll give you them for free for now, but after the crop comes in I will take half of it.
Having nothing to lose, I make the deal. Plant the seeds, and sure enough, next year my crop is worth ten times ten thousand…
Then comes back the well dressed stranger and asks for his fifty percent. I cry real tears, FIFTY PERCENT, I shout, that’s half of all I earned, NO. NO.
At this point we interrupt this stirring drama to point out that even after paying the fifty percent “tax” I am five times richer than I was before I made the deal with the man in the striped suit.
But Tim feels cheated. percent paresis.
Well said Coberly! It makes my point that corporations and their shareholders should both be taxed because each recieve seperate benefits from the government. Indeed according to the Supremes, and Mitt Romney corporations are persons. You do not have to go that far to realize that there are all kinds of nbenfits that flow to corporations at the corporate level which they should pay for. With the real after tax profits that are left, if the corporation chooses to pay a dividend–as opposed to storing cash in overseas accounts hoping for another tax holiday–the shareholder also should be paying a tax given all the wonderful things that the government does for the individual like protect her from godless communists and different god loving terrorists. I guess the other point I would make is that my GOP friends always warn me that we are going to end up like Greece suggesting that we need to shut down social security to avoid deficit spending. My understanding of Greece is that a big part of the problem is that no one in Greece pays taxes. It seems that is the ultimate GOP goal in this country
terry
thanks.
and though you didn’t ask for it I can’t help telling you to tell your friends that Social Security has nothing to do with the deficit. never has, never will.
They have been lied to so thoroughly they won’t believe the truth when they hear it, and they sure as hell won’t take the ten minutes it might take to verify the truth.
meanwhile, of course, there are the “liberals” who like to point out that “the workers paid for their own Social Security,” and in the next breath say, “we can save Social Security by taxing the rich.”
you can see why I don’t have any friends.
oh, the reason SS “never will” have anything to do with the deficit is that once they start taxing the rich to pay for it, or just borrowing the money, it won’t be Social Security any more. It will be welfare as we knew it, exactly what SS was carefully designed to avoid.
but they will call it “social security” anyway, just to keep the liberals and your republican friends confused.
they might even start it all with a “payroll tax holiday.”
“you can see why I don’t have any friends.”
Not that it’s worth much, but you have one (of a sorts so let’s just say admirers.) I may not agree with everything you say but I do love the way you say it.
Anna
thank you. that is actually more precious to me than you might suppose.
but i was actually joking. at least, i do have friends in real life. i just make enemies right and left whenever i talk about politics, which, of course, i never do in real life.
Meanwhile
to return to our program…
the special pleading by the corps would be funny if it wasn’t so tedious.
every time someone proposes a tax on corporations, they rush out and tell us it will just get passed through to the consumers.
the rest of the time they tell us how taxes on corporations strangle the economy.
apparently without fear of contradiction.
The arguments in this case for “tax them, not me” are well known. These are the arguments that are always trotted out. My question is, what’s the legislative strategy? This tax break expires. If nothing is done, it goes away. Political winds seem to have shifted, so simply marching up to Capitol Hill and saying “bad for job creators” may not be enough. Is it being tied to some vote-getting proposal? Are Senate Democrats secretly pining to renew this one?
My guess is that most folk have already decided which tax arguments they are willing to be bamboozled by. The issue then becomes how the sausage gets made.
We bristle whenever some Conservative/Republican lumps all poor people, all black people, all women, all SNAP recipients into one ugly blob. No question that the vast majority of dividends and cap gains to individuals are received by people at the top of the income scale.
Not all wealthy high-earners are unwilling to pay more. Not all dividends and cap gains are received by wealthy high-earners and pension funds.
If I was the sausage-maker, I’d want to be sure that prudent retirees who never earned more than median income for their household were not suddenly lumped in with the likes of Mitt Romney and Warren Buffett. Specifically, current cap gains rate is 0% and 15% and depends on income. Obama promises no tax increase for “those” earning less than $250K. So how about adding some brackets at the top?
And what of qualified dividend income? It wasn’t that long ago that dividends were taxed as ordinary income. A bit longer ago than that, dividends up to $100 were not taxed. If you’re going to tax qualified dividends as ordinary income, then reinstate a reasonable exclusion threshold from taxation so as to ensure that those being treated as “fat cats” reasonably fit the definiton.
Taxation is actually even more complicated than sausage-making, and when it comes to this kind of sausage-making there are very few I would trust, and I’m not sure any of them are in government.
Well linda, one place where I depart from any number of the left of center folks on this blog is the idea that the tax system should be out to get the rich and spare everyone else. i personally would like to see everybody who earns income pay at least a little bit in federal oncome taxes–not just social security and medicare because like Coberly, I view that as savings/insurance not part of a welfare program and do no equate it with paying income taxes to suport the government of the country we all live in. That being said I do think that the tax system needs to be more sharply progressive than it currently is and that there is nothing unfair about asking society’s “winners” to pay at a higher rate for the country that let them win. under those circumstances what is wrong with just taxing dividends like ordinary income? The little guy or gal pays taxes at a very modest rate and the rich folk pay taxes at a higher rate. As I noted earlier it really is not double taxation because the corporation consumes government services at the corporate level and the shareholder consumes government services at the individual level. I have to think about capital gains a bit, but my inclination is to treat them as ordinary income too and let a progressive tax structure wlork it out.
terry
it may not help you, but i agree. as long as we think of taxes as “punish the rich” we are in a bad place politically if not… well, not morally exactly, but i think it does damage to us if we are always thinking of why we should get the biggest piece of the burfday cake.
i would hope progressive tax would take care of Linda R’s fear of being impoverished by having your retirement savings taxed away in some ill thought “get the rich” tax scheme.
and i think taxes are needlessly complicated by everyone having a really really good reason why they should be taxed less and the other guy taxed more.
the “flat” tax is popular for a reason. it’s too bad it’s proponents are dishonest and really mean “tax the poor” but do not tax the “job creators.” if they were honest, the same appeal of the flat tax… it’s simple and you don’t have to hire a lawyer to figure your taxes… would apply to a graduated income tax on all forms of income.