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.
Going to throw some radical fodder on the table.
Cutting corporate taxes costs us exactly nothing – the government does not need taxes to fund anything now that we are off the gold standard, Bretton Woods is gone, and we are a fiat currency. Taxes do have purposes, but its not mechanically revenue generation.
Second, deficits are a major driver of corporate profits. Lower deficits mean lower corporate profits – thus less revenue with the tax in place. Kind of like a snake eating itself.
Another thing to think about is the cooperate tax is making losses more valuable further distorting policy making.
If you want to use taxes as a public policy lever on corporations, then it must be a tax shared by all corporations money losers and profitable ones. Think of it this way, the corporate income tax is helping companies such as AIG, when they should be punished.
Some reading on what I have put on the table:
Taxpayers do not fund anything
Deficits as a driver of corporate profits (with some good links)
Kalecki’s Profit Equation
Reminds me of my graduate school financial accounting prof.
“Deferred tax accounting (for GAAP) is crap.”
“But a tax-rate reduction means some of those credits and deductions, counted as assets on the balance sheet, would be worth less,…”
So, what is money anyway? 🙂
If we’re going to go all MMT, then why not eliminate all taxes?
If the Fed debt is 100,000% of GDP, then what harm could that do?
Jazz, even from an MMT perspective taxes do serve purposes. Regulate aggregate demand, control inflation, or achieve social good (like a carbon tax) – but the government is not dependent on taxes to spend.
Taxes that are too low, and deficits that are too high do have a consequence – which is inflation.
Right now we do not have an inflation problem – not even close.
In the end the corporate income tax is horribly inefficient, self defeating, not all companies pay it, it distorts investment, and rewards companies that lose money at the public expense like AIG.
Forgot to add taxes also create demand for the currency.