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

Bill Clinton thinks corps will put people first, profits second…all on their own.

So, Bill baby thinks the corps are going to see the light and return to the good old days of having a social conscience.  Heck, they will even see the light regarding their role as a member of society in the US.   And, here is the best part.  This is all going to happen without the government!

“I think the government can have incentives that will encourage it, but I think by and large it will happen, if it does, because of proof that markets work better that way,” Clinton said…

Right out of the Milton et al, Republican, conservative free market text book.  (Hope you are all reading Beverly’s post.)

He quantified it with:  “This corporate change, Clinton said, will be one of the most important keys to building a better future.”   Well he sure has that correct.  It is important as a key to building a better future.

Corporate taxes down, workers’ taxes up–that’s America today

by Linda Beale

Corporate taxes down, workers’ taxes up–that’s America today

Corporate taxes used to constitute a significant portion of federal revenues, almost a third in 1950.  Payroll taxes from workers were considerably less–around 10% in 1950.  Andrew Leonard, Who Really Pays Taxes? (Aug. 28, 2012).
The times have changed.  Corporate taxes have declined steeply in the 21st century as a percent of GDP, while payroll taxes paid by workers have become a significant part of tax revenues–more than a third in 2007.

That is one cause of the inordinate inequality of income and wealth that this country now endures–an inequality that has dire consequences for the economy and for the well-being or the vast majority of ordinary Americans.

Corporations Don’t Need More Tax Breaks

by Linda Beale

Corporations Don’t Need More Tax Breaks

If you listen to the corporate lobbyists, and the right-wingers who plead their cases for them in Congress and in the media, you’d think that corporations are so heavily taxed that it is threatening their ability to continue to conduct business and be competitive in world markets. But is that really the case? This blog has often pointed out two obvious shortcomings in the corporate whine: first, the corporate statutory rate of 35% is honored in the breach–most corporations pay actual tax rates so significantly lower than 35% that the statutory rate is an illusion; and second, as far as global competitiveness is concerned, the corporate tax rate is the only significant tax that US corporations pay, whereas most other countries have both corporate income taxes and VAT taxes, often paid at each transactional stage of production.

A site called “NerdWallet” provides considerable information based on analysis of the financial statements of companies, providing greater transparency for investors and, lucky for us, for those of us interested in tax facts.   See, e.g., the NerdWallet study, Top Companies Paid 9% Tax Rate (July 24, 2012).

Because tax provision includes both domestic and foreign, current and deferred taxes, NerdWallet researched further to find how much was actually paid by these American companies to the U.S. federal government in the most recent tax year.  By dividing the current portion of federal taxes by pre-tax income, NerdWallet was able to calculate the percentage of these companies’ earnings that was paid to the U.S. government. For the ten American companies with highest earnings in the most recent fiscal year, this number averaged 9%. NerdWallet Study (emphasis added).

A press release about the study notes just how much corporate taxation has shrunk as a source of revenue in the US, as corporations pay lower rates than ordinary Americans.

A new NerdWallet study found the 10 most profitable U.S. companies paid an average of just 9% in federal taxes last year. These low rates are particularly shocking given that the official tax rate is 35%. The study also revealed that more than half of the 500 largest U.S. companies paid a lower tax rate than the average American.  NerdWallet press release (July 30 2012).

NerdWallet also has a very useful tool for seeing what each major corporation of the top 500 actually pays in taxes, available here. You can scroll through a list of corporations to select a particular one of interest, and the tool will show the actual rate of taxes paid to the U.S. government, the compensation paid to the CEO, and the average compensation for the company’s employees, as well as the multiple of the CEO compensation to the average employee compensation. For example, the tool provides the following information for several of the largest of the 500 corporations.

1. Exxon Mobil Pre-tax Earnings: $73.3 Billion Actual Taxes Paid: $1.5 Billion (2%)
2. Chevron Pre-tax Earnings: $46.6 Billion Actual Taxes Paid: $1.9 Billion (4%)
3. Apple Pre-tax Earnings: $34.2 Billion Actual Taxes Paid $3.9 Billion (11%)
4. Microsoft Pre-tax Earnings: $28.1 Billion Actual Taxes Paid: $3.1 Billion (11%)
5. JPMorgan Chase & Co Pre-tax Earnings: $26.7 Billion Actual Taxes Paid $3.7 Billion (14%)

cross posted with ataxingmatter

Whiny Apple Pioneered Avoidance Strategies, Books Fictional Tax Rates

by Kenneth Thomas

Whiny Apple Pioneered Avoidance Strategies, Books Fictional Tax Rates

If you haven’t yet seen The New York Times article on Apple, go read it. I’ll wait. It’s a blockbuster.
As I wrote last month, Apple whines about the fact that it has to pay taxes. But of course, it does much more than whine. It sets up subsidiaries in tax haven states like Nevada to avoid U.S. state taxes, and establishes foreign tax haven subsidiaries in order to avoid U.S. and other government’s taxes. Then, through the magic of transfer pricing, profits made in high-tax jurisdictions becomes taxable only in Nevada, Ireland, Luxembourg, etc. The Times reports estimates by Martin Sullivan that this saves Apple $2.4 billion a year in U.S. federal taxes alone, not to mention what it save in U.S. states or foreign countries. This is a conservative estimate, based on only 50% of its profits being due to U.S. operations. A more realistic 70% allocation of profits to the U.S. would mean that Apple’s federal tax bill would be $4.8 billion higher, according to Sullivan.

Based on extensive interviews with former Apple executives as well as accountants for other firms, Charles Duhigg and David Kocieniewski show that not only does the company practice extensive legal avoidance of its taxes, but that the firm pioneered several of the most important tax avoidance techniques out there:

Apple, for instance, was among the first tech companies to designate overseas salespeople in high-tax countries in a manner that allowed them to sell on behalf of low-tax subsidiaries on other continents, sidestepping income taxes, according to former executives. Apple was a pioneer of an accounting technique known as the “Double Irish With a Dutch Sandwich,” which reduces taxes by routing profits through Irish subsidiaries and the Netherlands and then to the Caribbean. Today, that tactic is used by hundreds of other corporations — some of which directly imitated Apple’s methods, say accountants at those companies.

Not only that: Apple paid, according to The Times article, $3.3 billion in “cash taxes” on its $34.2 billion of worldwide profits, for a 9.8% tax rate, as opposed to the $8.3 billion the company’s 10-K report said it paid. As the article notes:

“The information on 10-Ks is fiction for most companies,” said Kimberly Clausing, an economist at Reed College who specializes in multinational taxation. “But for tech companies it goes from fiction to farcical.”

Some commenters on my article last month actually cited these 10-K figures as proof that nothing was amiss at Apple. As it turns out, the company’s reporting has other major gaps. Its 2011 10-K Annual Report states that it has only two “significant” foreign subsidiaries, both based in Ireland. Apparently its Luxembourg subsidiary — with over $1 billion in 2011 sales, according to The Times — is not significant. Nor are its subsidiaries in the Netherlands and the British Virgin Islands, despite their importance in keeping Apple’s worldwide taxes low. Because Apple only deems its Irish subsidiaries “significant” and does not report on any others’ existence, the Government Accountability Office report of 2008 on tax haven subsidiaries was misled into saying that the company had only one such subsidiary. We can only wonder how many other tax haven subsidiaries are omitted from companies’ SEC filings.
Here’s the kicker: Even “cash taxes” is not a figure that accurately represents a given year’s tax payments, according to The Times.

As Richard Murphy points out, while Apple’s tax strategy is no doubt all legal (“perfectly legal,” as in the title of David Cay Johnston’s great book), “It’s also profoundly unethical.” Apple largely rejects its duty to help pay for living in a civilized society, even as state (like its home of California) and national governments flounder with debt. Its behavior forces one or more of three outcomes, as I have written many times before: shifting the tax burden to others, more government debt, or program cutbacks. Apple’s behavior shows that it’s clearly okay with that.

The solution starts with Murphy’s innovative “country-by-country” reporting, which does not require the tax havens to cooperate because all the information would be supplied by the company. Then, as I noted in November, we need worldwide unitary taxation to strip out the artificiality of companies’ allocation of assets and profits. We could treat Apple’s (and Microsoft’s, and…) “ownership” of patents in Ireland as the fiction it is, and force these companies to pay their fair share of taxes.

crossposyed with  Middle Class Political Economist

AEI Economists and the Ugly Memory Hole

by Mike Kimel

From an article in the NY Times:

Politicians sometimes say that lower tax rates lead to higher economic growth, which in turn leads to higher overall tax revenue. This may have been true in the early 1960s, when the top tax rate was 91 percent, but the top tax rate today is 35 percent. For decades, lower tax rates have led to lower government revenues, says Alan Viard, an economist at the American Enterprise Institute, a conservative policy group. “The Reagan tax cuts, on the whole, reduced revenue,” he explains. “The Bush tax cuts clearly reduced revenue. There is no dispute among economists about that.”

I guess we can credit Viard with actually looking at data on taxes and revenues, and having at least enough honesty not to obfuscate results.

Sadly, there is a dispute among the folks who call themselves economists about that, and it seems particularly easy to find that category of economists among the type of folks who are willing to associate themselves with the American Enterprise Institute.

Here’s Kevin “Dow 36,000” Hassett of the AEI, not incidentally co-author of Viard with a paper currently highlighted on the AEI’s website:

Republicans have asserted for years that just about all tax cuts pay for themselves. They’ve almost always been wrong about that. But with regard to corporate taxes, it’s true.

As Hassett notes in his piece, the top US corporate rate in 2010 was 35 percent. Note the Viard quote shown earlier.

Then there’s AEI visiting scholar R. Glenn Hubbard, previously the first Chair of the Council of Economic Advisers under GW Bush, and as we all remember, a huge advocate of tax cuts all around. I found this old Brad DeLong post from Hubbard’s White House days. DeLong quoted, in its entirety, this letter by Hubbard that was printed in the Washington Post.

Washington Post
Low Taxes and Growth for All
January 4, 2003; Page A15

A Dec. 16 news story in your paper stating that a Republican economist does not care about the deficit and wants to raise the tax burden on the poor was too good for Michael Kinsley to check [“Republicans Go Positive on the Deficit,” op-ed, Dec. 23]. Had he checked the complete text of my Dec. 10 speech, it would have been clear that I believe the fiscal position does matter and that a pro-growth policy with lower taxes for everybody makes sense.

The president is committed to fiscal discipline, and he rightly believes it is important to balance the budget. The deficit we now face is caused by national emergency, war and recession. We must keep in mind that growth leads to surpluses, not vice versa. Promoting economic growth and job creation is the aim of the administration–and this will lead back to a balanced budget. At the same time, the peer-reviewed economics literature shows that long-term interest rates do not go up in lockstop with the budget deficit. This is apparent from recent history.

The Dec. 16 article and Kinsley suggest that by acknowledging the challenges inherent in fundamental tax reform, the administration favors increasing taxes for some individuals. But the record makes clear this is not the case: The president and this administration know that lowering taxes for everybody leads to growth. This continues to be the sound policy of the administration.

— R. Glenn Hubband, Chairman, Council of Economic Advisers

Notice… he talks about “fiscal discipline” but he is very clear, “growth leads to surpluses.” Fiscal discipline is important, but it isn’t what leads to surpluses. The only way that is true is if the faster growth generated by tax cuts leads to increased tax collections.

Note that this was 2003… and Hubbard and his boss had already given us tax cuts in 2001 and 2002.

Anyway, I can go on, but it seems to me Viard’s comment is merely part of a concerted effort to scrub a large history of very, very bad economic forecasts down the memory hole. Sorry, but unless and until Viard calls out some his big name colleagues by name, it is going to be just as hard to take him seriously as it is to pretend that folks like Hubbard and Hassett don’t have a long history of promoting very damaging policies, and doubling down when those policies blew up.

The Supreme Court’s corporate monsters–if money buys them "free speech" rights, can it help them avoid giving others human rights?

by Linda Beale

The Supreme Court’s corporate monsters–if money buys them “free speech” rights, can it help them avoid giving others human rights?

The Supreme Court decided in Citizens United that corporations could intevene to influence elections–giving money and aide to their selected candidates. This was an inordinate broadening of corporate “personhood”, claimed to be necessary under the warped First Amendment precedents of the Supreme Court that count “money” as speech and thus consider that limitations on money spent to influence elections as a limitation on speech.

Yet most economists and tax professors argue against the corporate tax–which has been in place longer than the individual income tax–on the grounds that taxes distort and that the claimed “double taxation” of corporate income distorts the allocation of capital. See, e.g., Tax Foundation, 2004 paper on integrating corporate and personal income taxes; seminal 1985 integration piece from NBER. Much of the argument boils down to an a prior assumption that “only people can pay taxes.”
(Of course, we used to think that only people could engage in campaign speech or bribe politicians for quid pro quo policies or otherwise influence the course of society. We were naive.)

As a result of this “received wisdom” about economics and corporate taxes–mostly based on the mathematically correct but practically challenged Chicago School approach to understanding economic systems (by assuming away most of the real world, including life, death, and everything in between)– corporate lobbyists and their allies in Congress have been pushing for decades to eliminate corporate taxation through integration of the corporate and individual tax schemes or at a minimum to drastically reduce the liability of corporations for federal income taxes.
Every presidential candidate has one scheme or another to reduce corporate taxes, with even Obama falling prey to the continuing influence of the Wall Street facilitators like Timothy Geithner in the Treasury and Larry Summers. See Citizens for Tax Justice, President’s Framework Fails to Raise Revenue (pointing out that there is no reason not to fix the loopholes in corporate tax to help address the deficit without having to lower corporate rates, and noting that although Obama at least called for making his rate reduction framework for so-called corporate tax reform revenue neutral, his plan fails to raise about a trillion dollars to make up for the corporate taxes that it gives up). As CTJ notes, many organizations have called for the opposite–to raise revenues from corporations that have been paying very little in taxes, especially since the 2003 Bush “reforms” that granted most of the items on corporations’ wish list for tax cuts.

Last year, 250 organizations, including organizations from every state in the U.S., joined us in urging Congress to enact a corporate tax reform that raises revenue. These organizations believe that it’s outrageous that Congress is debating cuts in public services like Medicare and Medicaid to address an alleged budget crisis and yet no attempt will be made to raise more revenue from profitable corporations. Id.

Nonetheless, most candidates call for making the corporate income tax territorial and thus making it even more lucrative for US multinationals to move more of their corporate businesses (and jobs) abroad. Most call for reducing the rates on corporations to a historically unprecedentedly low level–making it even more likely that the US trade deficit and corresponding budget deficit will continue to grow, even at a time when these self-nominated fiscal “conservatives” are claiming that the current deficit requires monumental sacrifices from ordinary people in the way of reduced medical care and old age security (the effort to cut back drastically on the benefits payable under Medicare and Social Security).

Most treat the owners of corporate equity as though they were some kind of revered engine of growth, when in fact they are usually merely rich people who are interested in reaping as high a profit as possible from sales of corporate shares but very little interested in entrepreneurship, and as likely to engage in quick trades (the profits of which go into their pockets and not into the working capital of the corproations) as to hold long-term based on analysis of corporate business fundamentals. Most don’t accompany their form of integration with eliminating the category distinction between capital gains and ordinary income.

Most “corporate reform” plans call for continuing most of the absurd provisions that have larded the pockets of corporate management over the last few decades, such as

  • accelerated depreciation and expensing (including all the depletion allowances for the heavily subsidized oil and gas extractive industry, even while it complains about the petty little incentives put in place in recent years for environmentally sound energy generation–accelerated expensing creates “phantom” deductions that reduce taxable income well below economic profits), and
  • the “research & development” credit, which was first enacted as a stimulus that was to be in place for a very short period of time but has been extended in fits–even retroactively for several years–as corporations demand making every single “stimulus” tax break they get permanent.

(As readers of this blog know, I see little merit in the R&D credit. Corporations can already deduct way too much “phantom” expenses–excess interest expense that allows them to operate with too much leverage, facilitating equity firm buyouts by leveraging up the purchased entity to pay off the equity strippers. Further, as with so many of the GOP’s favorite programs of tax subsidies for multinationals and the upper crust, it hasn’t bothered to conduct studies to see if the R&D credit indeed results in more research done in this country. Clearly, a retroactively enacted credit does NOT incentivize research.

Probably the times it’s been enacted without being retroactive haven’t either–it takes extensive labs and equipment to do research, and such labs and equipment have to be purchased far ahead of when they pay off. Most of the R&D that the credit supports is likely to be of the “tweak-a-patent” variety that seeks merely to find a way to extend a monopoly profit from a particular profit–something the patent law should frown upon.)
So the drumbeat for lower corporate taxes–at a time when corporations are paying less as a proportion of GDP than they did in the time of our most sustained economic growth–continues unabated from the right joined by only slightly less enthousiastic accompaniment at the White House and think tanks like the Tax Policy Institute.

Meanwhile, the Supreme Court, having anointed corporations with a kind of personhood that lets them intervene in elections even though they have no vote, has taken for consideration a case that challenges the rights of individuals to hold corporations accountable as people are held accountable for human rights violations. The case is Kiobel v Royal Dutch Petroleum (2d Cir. 2010), in which Nigerian plaintiffs seek to hold Royal Dutch/Shell liable for violating the Alien Tort Statute (“ATS”), 28 U.S.C. § 1350, which upholds international norms of human rights.

The Second Circuit held that US courts cannot entertain such suits, holding that jurisdiction under the Alien Tort Statute against corporations requires an international norm approving sanctioning corporations for torts and that requires more than the mere fact that most countries treat corporations under their domestic law as capable of committing torts. The court in the Second Circuit opinion makes a point much like economists tend to make about taxes–essentially implying that “only people commit heinous acts”.

From the beginning, however, the principle of individual liability for violations of international law has been limited to natural persons—not “juridical” persons such as corporations—because the moral responsibility for a crime so heinous and unbounded as to rise to the level of an “international crime” has rested solely with the individual men and women who have perpetrated it. Second Circuit in Riobel.

While people are the “deciders” of corporate decisions, nonetheless the corporate form permits corporations to engage in conduct that individuals alone cannot engage in–from amassing huge resources to carrying out massive enterprises that pollute and steal human dignity. To ignore that reality of corporate wrongdoing, especially in an age that has anointed corporate personhood with rights that seem furthest from ones that corporate entities should be permitted to enjoy, would be folly.

For further discussion of the implications of the case, see Peter Weiss, Should corporations have more leeway to kill than people do?, New York Times (Feb. 24, 2012).
Suffice it to say that this case raises the specter of full-blown corporatism overtaking the entire U.S. economic and social system. If the Supreme Court accompanies its “personhood for free speech/election intervention rights” with “not people so can’t be touched for human rights violations”, there will be even fewer ways to hold multinationals accountable, and they will forge even stronger relationships with autocratic dictators who treat their citizens like slaves and their environments like garbage pits. Meanwhile corporations will continue to intervene in our elections at will (usually the will of their ultra-wealthy managerial class), using the extraordinary power of the resources at their command.

We will all be the worse for any decision that would allow multinationals to expand their quasi-sovereign rights without saddling them with a strong obligation to comply with international norms respecting human rights. Rights without obligations are invitations to corruption.

crossposted with ataxingmatter

How the Internet Can Make You Smarter, Today’s FT Version

Today’s Page 1, above-the-fold, biggest type headlines for the FT:

  1. US PDF edition: “Obama proposes corporate tax rate cut: System ‘outdated, unfair, and inefficient’

  2. US Print edition: “Obama and Romney unveil rival tax plans: Proposals show strong support for reforms”

The latter piece waits until the 7th graf to Tell the Truth and Shame the Romney (as Rick Santorum might say):

Mr. Romney’s advisers said that their plan would not widen the deficit, but they relied on so-called “dynamic effects”, which assume that the lower rates mean greater economic growth and therefore more revenue. They did not say which tax breaks—such as the popular deduction for mortgage interest relief—they might scrap to pay for the lower rates.

The English translation of “dynamic effects” is “we’re going to reduce the velocity of money so that it is held by people whose Marginal Propensity to Consume is lower, and count that as a good thing, instead of it being used by people who will not hide it in the TOPIX, and who therefore don’t count in economic modeling. Because that worked well when we did it in 2001 and especially 2003.” (See Noah Smith for discussion.)

The print edition treats this mumbo-jumbo as if it were a real “tax plan.” Readers of the online PDF are saved such bollocks, and therefore better informed at the end of the article.

UPDATE: Ezra Klein (whom Google Plus seems to believe works for Bloomberg, not the web-inept Vast Wasteland that is Kaplan Prep Daily) delves into the Romney/Hubbard plan and finds pretty much what you would expect from the man who led the clusterfuck of 2003 and an at best ambiguous relationship with Medicare Part D* (“all of the expenses without any of the savings, unfunded”):

But for now, the narrative is clear: A Romney presidency will be tough on those who depend on government programs, and good for those who pay high taxes. That suggests a Romney presidency would, at least in its first few years, reduce the deficit by asking much more from the poor than from the rich. Is that really the narrative they want?

*Shorter Glenn Hubbard: “It happened on my watch, and I knew it was in the works, but the “gross mismanagement” of the Bush Administration in enacting Medicare Part D astounds me and I had nothing to do with it.”

Why we don’t need corporate tax "overhaul":

by Linda Beale

Why we don’t need corporate tax “overhaul”

GOP poormouthing on behalf of rich corporate allies(Part I in a series) These days, one hears a great deal from politicians on the right about how a corporate tax “overhaul” is needed because our taxes are “too complex” and/or “too anti-competitive” or because our tax rates are “too high”. The same GOP politicians who whine and whimper about how huge the deficit is, and accuse President Obama of driving our country to ruin with the deficit are willing to lower the tax burden paid by highly profitable corporations considerably (thus increasing the deficit and adding to regressivity of the tax system)–so long as they are appeasing their multinational constituency, the huge corporations who are the new providers of campaign funds and the new decisionmakers in elections–even though the corporate entities have no vote. Claims of revenue neutrality are generally little more than PR cover for corporate giveaways.

Just a couple of examples from a recent Bloomberg piece:

  • Republican Senator Robert Portman says he will unveil a new proposal soon that will cut taxes for multinational companies’ repatriated offshore profits–i.e., a permanent tax holiday for multinationalsm as a first step towards a very MNE favorable move to a territorial tax system–that will remedy “an inefficient and complex maze of tax preferences”. See, e.g., Kathleen Hunter, Portman Corporate Tax Plan to Include Low Repatriation Rate, (Feb. 1, 2012). Portman claims this huge tax cut for the high and mighty MNEs (and their managers/owners) is needed because they “pay[] a very steep tax bill if and when they choose to bring their money home.” Ludicrous. There is a very generous foreign tax credit provision that allows many MNEs to reduce their taxes to near zero anyway. Further, the deferral they are allowed on active business income gives them the time value of money benefit. Most of what foreign corporations want to do is allow their taxes on non-US income to reduce their taxes on US income–which is a kind of subsidy for offshoring that costs US jobs. And of course, as I’ve noted in earlier posts on tax holidays and proposals for a territorial system to replace a worldwide system, corporations hold more money overseas when they think there is a good chance that their buddies (or “bought pols”?) will give them the tax break they have been lobbying for–so these proposals encourage corporations to engage in the activity that these proposals say they are addressing, thus giving them more ammunition to get the change they want. Portman, of course, says he wants to “streamline” the corporate tax and lower the rate to 25%. We have a statutory rate of 35% now and most corporations that pay taxes (which are not by any means all of the corporations that make significant profits) pay less than 25%. If we lower the statutory rate to 25%, it is quite likely that most corporations that actually end up paying taxes will be a smaller number than with the 35% rate and at a much lower rate–probably around 10-15% instead of 20-25%. Of course, what the result will be–as it was in the 1986 tax reform that lowered rates for ordinary income and ended a number of problematic tax preferences such as the capital gains preferential rate–is that the lower rates will stay, and all of the loopy tax preferences (and more) will be reenacted within a couple of years under heavy lobbying for the same by the corporations that benefit from this round.
  • Dave Camp, Michigan Republicans and Chair of the House Ways and Means Committee, wants to exempt 95% of overseas profits.

Is there merit in this drumbeat of (lobbyist-induced) calls for “corporate tax overhaul legislation”? The simple answer is no.

On Complexity:

Most complexity in the code is there for one of two reasons.

The most likely reason for complexity is the creation of tax preferences heavily lobbied for by corporate lobbyists. One example is the so-called “domestic production activity deduction” that lowers the tax rate by 9% for most industries (even ones that don’t really produce anything) and 6% for natural resource extractive industries. There are tax breaks on top of tax breaks for the resource industries, of course, that get numerous special benefits throughout the Code, while joining in various coalitions that lobby AGAINST even extraordinarily modest support for green industries (such as reasonably low cost loans for solar power).

The second main source of complexity is the clear need for specific anti-abuse provisions to undo the harm done when corporations use what can most charitably be called aggressive and inventive interpretations of Code provisions–often ones that are hyper-literal in nature (the kind of analysis that allowed the Bush Treasury to redefine what “exchange” means in the reorganization provisions in order to allow taxpayers to manipulate the allocation of consideration to create a hitherto unrecognizable tax loss in the reorg transaction) or turn the Code’s clear textual provision on its head (look at the briefs for the defendant–or for that matter the lousy statutory interpretation in the district court opinions– in the Black & Decker contingent liability shelter case, where Black & Decker argued for application of a provision in section 357(c) (which says explicitly that it applies only where paragraph one of that provision applies) in a context where paragraph one did not apply).

As a result of the contingent liability shelters, Congress added various Code provisions, including section 358(h) (having to do with the basis for corporate assets in transactions with significant liabilities) and section 357(d) (having to do with calculating the amount of liability assumed).
Complexity, in other words, is not an evil in itself. Sophisticated taxpayers aren’t harmed by complexity, and in fact complexity is needed to provide sufficient detail to prevent sophisticated taxpayers (with the help of their tax advisers) from cheating. There is generally less complexity in provisions that are relevant for unsophisticated taxpayers, though it is more clearly an obstacle to good tax compliance behavior there.

On Competitiveness:

Competitiveness is used so frequently that it seems doubtful that anybody really knows what they mean by it. If one company destroys a union and is able to pay their workers lower wages as a result, then a company that produces a similar product will claim that “competitiveness” requires that they be allowed to do the same. Of course, another approach would be for the company that retains an active union, and continues to provide pension and health care benefits could lobby Congress to enact stronger laws protecting worker rights to pension and health care benefits. In other words, competitiveness is consistently used as an argunent, when it comes to corporations, for taking away benefits to workers, communities, states and the nation for the benefit of the corporations.

Competitiveness could just as easily be used to argue for maintaining programs, procedures and benefits for workers, communities, states and the nation by considering what would be necessary to buttress the system that supports those benefit levels. And in fact that view of competition–that we are competing globally to create both profitable companies AND a secure and well-paid workforce that can support a healthy economy that can in turn support a quality of life in all dimensions–would lead to different decisions not only about taxation but also about anti-trust, excise taxes, trade treaties, environmental protection, and many regulatory projects.

Furthermore, competitiveness is often used as an argument in the abstract when the main competitors are both US based companies. There, the argument for reducing taxes to enhance competitiveness is at its weakest, but few competitiveness arguments reveal just how the competititon is playing out even on a globalized playing field.

On Rate Structures:

The 1986 tax reform act is a frequent reference these days when people talk about amending the Code generally and specifically about amending the corporate tax provisions. But the context for that act’s passage was quite different. Individuals were taxed at rates that were reasonably progressive–with a top rate at 70% (though the brackets could probably have been better defined to differentiate among top income recipients). Further, the 1954 Code had built up a plethora of tax preferences (especially useful to the rich) and the Congress had realized that the preferential capital gains rate was wreaking havoc on sensible provisions because of the arbitrage opportunities it created. Thus, there was room for “base broadening” (removing ill-advised preferences spread throughout the 1954 Code) as a means of paying for “rate lowering” (lowering the fairly high rates about half, without costing the fisc because of the higher amount of income on which those rates would be charged).

We are not in the same situation today. We have very high deficits because of an economic crisis caused by two interwoven problems–(i) the lax regulatory oversight of 40 years of Reaganism, which permitted the financialization of the economy and led to excessive incomes for people at the top (managers and owners, hedge fund and equity fund managers, and speculators generally) and excessive debt for banks and especially people not at the top (because of their stagnant or reduced incomes in the face of growing costs, caused in part by the relaxation of regulations and anti-trust activity coupled with the anti-union attitudees and activity); and (ii) the success of a radical right-wing fringe in characterizing government and business as having adverse interests and progressive programs supporting social well being (from Social Security to Medicare to Medicaid to (modest) heatlh care reforms intended to reign in the cost of medical care to unemployment benefits to efforts to reign in contracts of adhesion in the consumer credit markets) as “unmerited” “entitlements or costly and anti-competitive regulation of businesses that counters the “free market” that will ensure “growth and jobs”.

The result of the rhetoric is a citizenry that is ignorant of the actual income distribution, tax burdens, and impact of government spending on jobs and the health of the economy. The result of the 40-year “reaganomics” effort from the right to cut regulations, cut taxes, privatize and militarize is that this is no context for rate reduction but in fact a context in which those who can afford to do so–for sure those individuals and households in the top two quintiles of the income distribution that comprise the upper middle class and the upper class and all profit-making corporations–should be paying taxes at HIGHER rates, not lower rates.

It should be noted that President Obama–who is at best a middle of the roader on tax issues–also is said to plan to propose an “overhaul of the U.S. corporate tax system” in connection with his budget plan for FY 2013 that involves lowering rates and base broadening. See Steven Sloan, Obama said to propose corporate tax overhaul next month, (Feb. 2, 2012). Again–lowering the rate is a bad idea. Lowering the rate without base broadening is a stupid idea. But the kind of base broadening that is included, if such a proposal eventually passes, matters an awful lot. The problem is that if Obama proposes such a reform, the GOP won’t support it unless the “base broadening” is essentially inconsequential and can be undone easily later or affects only little guys and not the big-monied lobbyists. Thus this looks like another of those initiatives from the White House that play into the right’s agenda and do little to advance any progressive idea.

originally published at ataxingmatter

Guest Post: Does a lower Corporate Tax burden increase private investment?

Update: Dan here: I am posting Jon’s reply now to comments in this post. Technical troubles continue for Jon.

It is always a pleasure to find clear and concise posts from a ‘new’ econoblogger. Mike Kimel found Econographia. Hopefully more is on the way.

by Jon Hammond

Guest post: Does a lower corporate tax burden increase private investment

The efficacy of taxation in promoting or discouraging economic growth remains a hotbed of disparate perspectives on the part of economists and policymakers alike. Some politicians insist that more incentives for private investors — lower taxes on corporate profits — will lead to faster and better-balanced growth. According to a New York Times/CBS News poll in May 2011, a majority of Americans believe that increased corporate taxes “would discourage American companies from creating jobs.” The assumed mechanism for spurring economic growth and job creation is new private or business investment, incentivized by lowering the corporate tax burden.

The following graph displays a comparison of net private investment as a percent of GDP against corporate tax receipts as a percent of GDP … for the post-war period 1950 – 2008. The data is sourced from the Department of Commerce, Bureau of Economic Analysis (BEA), as follows:

GDP – NIPA table 1.1.5 here
Corporate tax receipts – NIPA table 3.2 here
Net business investment – NIPA table 5.2.5 here

At this level of analysis, we should expect to see an inverse relationship between the two, specifically: with a decline, over time, in corporate tax receipts as a percent of GDP, there should be an increase in net private investment over the same time period.

 Statistically, one would expect these two series to be negatively correlated.

Change in Corporate Taxes and Business Investment, 1950 – 2008:

As the graph shows, both corporate tax receipts and net business investment as a percent of GDP declined over the period 1950 – 2008. The data does not show an inverse relationship between the two series. Rather, the data shows a substantial positive correlation, i.e., high values in the tax series are associated with high values in the private investment series, and the same association is observed for low values. This counters the idea that business investment increases when the tax burden decreases. Moreover, this decline in business investment suggests that by retaining more and more of their earnings, corporations are failing to make economically productive use of their capital .. and shortchanging growth.

Ian Ayres on the Brandeis Tax

by Linda Beale

  Ian Ayres on the Brandeis Tax

I’ve often argued here that vast inequality is harmful to democracy, and that the kind of unequal society that we have today, reflected the Gilded Age of yore, is especially worrisome.  Much of what is happening in this country that threatens freedom and economic suffering for many is related to the vastly unequal incomes and wealth of the top 1% compared to the rest of us.  Oligarchy finds it easy to flourish in such a society, and democracy struggles to keep its head above water.  The corporatist agenda that favors big business (and its owners) facilitates the capture of the state for the benefit of the rich–lobbyists swarm legislators, and campaign funding by corporations floods the airwaves with repetitive (and hence believed even if untrue) messages favoring corporatist allies.

The main defenses that a society has against such developments are twofold:  1) a strong sense of community that incentivizes the uberrich to give a good bit of their wealth away to help the community and 2) a strong tax system–especially estate taxes and other taxes that fall primarily or exclusively on the uberrich as a way of skimming off the excess rents they have acquired because of their status and unrelated to genuine merit or hard work.  {As Elizabeth Warren said, nobody can claim to have earned all they earn without the help of the state, and the wealthy in particular depend on the state to protect their property and even their status.)  Hence I talk here of democratic egalitarianism and my view that equilibrium is not a realistic state so redistribution is always occuring.  Most redistribution will be ‘upwards’ for the benefit of those at the top, unless democratic institutions push for a rebalancing redistribution ‘downwards’ to assist those in the middle and lower income groups.

Ian Ayres has a series of postings on a proposed “Brandeis” tax intended to impose limitations on the inequality gap.   
Don’t tax the rich, tax inequality itself, New York Times, Op-Ed, Dec. 18, 2011.

In 1980, the wealthiest 1 percent of Americans made 9.1 percent of our nation’s pre-tax income; by 2006 that share had risen to 18.8 percent — slightly higher than when Brandeis joined the Supreme Court in 1916.

Congress might have countered this increased concentration but, instead, tax changes have exacerbated the trend: in after-tax dollars, our wealthiest 1 percent over this same period went from receiving 7.7 percent to 16.3 percent of our nation’s income.
What we call the Brandeis Ratio — the ratio of the average income of the nation’s richest 1 percent to the median household income — has skyrocketed since Ronald Reagan took office. In 1980 the average 1-percenter made 12.5 times the median income, but in 2006 (the latest year for which data is available) the average income of our richest 1 percent was a whopping 36 times greater than that of the median household.
Brandeis understood that at some point the concentration of economic power could undermine the democratic requisite of dispersed political power. This concern looms large in today’s America, where billionaires are allowed to spend unlimited amounts of money on their own campaigns or expressly advocating the election of others.

There will be rich always: finding a new way to think about income inequality, Freakonomics, Dec. 20, 2011.

The vast shift in national income toward our richest 1 percent is especially vivid if their income is expressed in terms of the median household income. Indeed, an important goal of our op-ed was to suggest a new unit of measure, “medians” to help us think about what it means to be rich. In 1980, if you earned 3.8 medians, you were in the top 1 percent, but by 2006 even the poorest in the 1 percent club earned 6.9 medians.
What we call the “Brandeis Ratio,” the average income of the richest 1 percent (which includes the billions earned by the lucky few) has grown even more disproportionate. As shown in the chart below, in 1980, one-percenters on average made 12.5 medians, but in 2006 (the latest year in which data is available) the average income of our richest 1 percent was a whopping 36 medians.

An inequality tax trigger: the Brandeis Ratio explained, Freakonomics, Dec. 21, 2011.

A central idea behind our Brandeis tax proposal was to have a tax that is triggered by increases in inequality. Our Brandeis tax does not target excessive income per se; it only caps inequality. Billionaires could double their current income without the tax kicking in — as long as the median income also doubles. The sky is the limit for the rich as long as the “rising tide lifts all boats.” Indeed, the tax gives job creators an extra reason to make sure that corporate wealth does in fact trickle down.
As emphasized by Lawrence Lessig in Republic, Lost (presaged somewhat in Ayres’ book with Bruce Ackerman, Voting With Dollars), the bulk of campaign finance dollars comes disproportionately from not just the 1% club, but the richest one-half of one-percenters.  Focusing on the average income of one-percenters is a good proxy for the rising political power of plutocrats.

Of lags and caps: possible implementations of a Brandeis Tax, Freakonomics, Dec. 26, 2011 (discussing potential ways to deal with bunching of income and the question of work disincentives–see my earlier post on Greg Mankiw).
originally published at