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Economix Blog: Kissing Away the Corporate Tax

May 31, 2013 by Leave a Comment

My column on Wednesday startled some readers. Was I proposing to do away with corporate taxes simply because globalization is making it easier for multinational companies to avoid them? Should we really just roll over and accept defeat?

Well, other advanced nations seem on their way to doing exactly that.

They have found a way of reducing corporate tax rates that improves economic efficiency, lowers the cost of capital for their companies and may even increase the progressivity of their tax system: offsetting those lower corporate rates with higher tax rates on the income that companies provide to their shareholders.

Since 2000, the top corporate tax rate in Britain has fallen to 23 percent, from 30 percent; in France it has receded to 34.4 percent, from 37.8 percent, and in Denmark it has declined to 25 percent, from 32 percent, according to data from the Organization for Economic Cooperation and Development.

Source: Organization for Economic Cooperation and Development

Many of these countries have compensated for lowering the corporate rates by taxing dividends more. Over the same period, the dividend tax rate rose to 30.6 percent in Britain, from 25 percent; in France, it went to 44 percent from 40.8 percent, and in Denmark it rose to 42 percent from 40 percent. Most industrial countries have also eliminated exemptions to prevent double taxation of dividends.

The United States has rowed in the opposite direction. Companies complain, rightly, that the corporate tax rate in the United States is too high compared to those of its peers: 39.1 percent, combining federal and state taxes – virtually the same as it was 13 years ago. But they rarely mention that the tax on profits flowing to shareholders has fallen drastically.

Even after the New Year’s budget deal raised taxes on the highest earners, the 20 percent top rate for dividends and long-term capital gains remains much lower than in the 1990s — when the top capital gains tax was 28 percent, and dividends were taxed as ordinary income.

A paper published a couple of years ago by Rosanne Altshuler of Rutgers, Benjamin H. Harris of the Brookings Institution and Eric Toder of the Tax Policy Center suggested that the American mix is particularly inefficient.

Because American corporate tax mostly falls on domestic profits (foreign profits retained abroad pay no tax), it raises the cost of domestic investment and encourages companies to invest abroad. It also encourages them to seek out low-tax havens around the world to park their profits. And it encourages companies to shed their corporate status to avoid the tax altogether.

The Altshuler-Harris-Toder paper suggests that reducing the corporate tax rate and increasing taxes on dividends and capital gains would be a much more efficient way to raise money.

Their calculation — which is only rough because it assumes no change in the behavior of companies or their shareholders — suggests that raising the top tax on long-term capital gains to 28 percent and taxing dividends as ordinary income (which faced a top rate of 35 percent at the time of the study) would raise enough money to pay for a cut in the federal corporate tax rate from 35 to 26 percent.

But the most interesting bit of the study is their finding that these changes would make the tax structure more progressive – increasing the tax burden on Americans with the highest incomes. That’s because the rich would bear the brunt of the increase in the dividend and capital gains tax.

Even assuming that shareholders bear the entire burden of corporate taxation — an assumption that is being questioned in the economic literature — the change suggested by the economists would lower the average federal tax rate of everybody except the top 1 percent of Americans, who would suffer a tax increase of 1 percent.

Under a different assumption — that corporate taxes are mostly paid by workers because of the impact of the tax on investment, jobs and wages — the progressivity would be steeper. In particular, those in the top percentile of income would see their taxes rise by 1.8 percent.

So getting rid of corporate taxes — or at least reducing them substantially — may not be such a bad idea. The tax burden would just have to be shifted from the companies to their owners.

Article source: http://economix.blogs.nytimes.com/2013/05/31/kissing-away-the-corporate-tax/?partner=rss&emc=rss

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Economic Scene: The Trouble With Taxing Corporations

May 28, 2013 by Leave a Comment

It hardly qualifies as a defense. But that is perhaps the most accurate statement that Apple’s chief executive, Timothy D. Cook, could have made to lawmakers inquiring last week about how its creative financial techniques contributed to its low business tax payments.

You may have heard of Google’s “Double Irish With a Dutch Sandwich” — an increasingly popular route through Ireland and the Netherlands that cleanses corporate cash of most of its tax liability.

Amazon and Facebook like the sandwich, too.

Don’t forget the fabled tax wizards in General Electric’s accounting department. Or what about Starbucks, which paid a grand total of $13 million in British corporate taxes over 15 years on revenue of more than $5 billion?

Starbucks is not a complex technology firm with a subsidiary in a low-tax Caribbean island charging its headquarters through the nose to license some cutting-edge software patent. It’s a chain of coffee shops, part of the predigital economy.

Still, despite a 31 percent market share, the company’s British subsidiary managed to report losses in 14 of its first 15 years.

The case of Starbucks is particularly troubling for every government concerned about how it is going to finance itself in the future.

As Edward Kleinbard of the University of Southern California noted: if Starbucks could generate so much “stateless” income — beyond the reach of tax authorities both where it makes and sells the Frappuccinos and where it is incorporated as a company — “any multinational firm can.”

That means that as the government seeks new sources of revenue to pay for an expanding safety net and an aging population, it should probably look outside the corporate sector.

“We have a tax problem; we are not collecting enough tax revenue — period,” said Jim Hines of the University of Michigan. “But we are never going to finance what we need with corporate taxes.”

Instead, governments seeking revenue might do best focusing their efforts on taxing people, who cannot flee as easily, or taxing what people consume.

Some of this may come at the expense of progressivity in the tax code.

The United States is the only advanced nation that does not have a value-added tax, which is similar to a sales tax and can raise lots of revenue. Peter Diamond from the Massachusetts Institute of Technology has suggested increasing payroll taxes to pay for increased spending on Social Security.

There are more progressive taxes — say taxing the “carried interest” charged by fund managers at the same rate as regular income, or raising taxes on dividends. That could raise money, though probably less.

But with countries around the globe in constant competition to lure investment by lowering tax rates and offering assorted breaks, taxing corporations will be an uphill battle. Multinational companies just have too many options to minimize their tax bill by routing profits through low-tax jurisdictions and losses through high-tax ones.

In the industrial era of the early 1950s, corporate income tax contributed almost a third of the total tax revenue raised by the federal government, equivalent to about 6 percent of the nation’s income. By the 1970s it generated about 3 percent. And in the last decade it raised around 2 percent of national income — only about $1 in $10 of all federal tax dollars collected.

Corporate tax revenues stopped shrinking as a share of the economy after the last major tax reform in the 1980s, moving up and down with the economic cycle. But they have failed to keep up with corporate profits’ rising share of the economic pie.

Part of this decline was by design. Notably, starting in the 1980s many companies were allowed to shed their corporate status so that their profits flowed directly to their owners — generating no corporate tax.

But globalization — combined with financial legerdemain — has opened wide new doors for companies to reduce their tax bill.

For all the complaints about the high corporate rate, from 1987 through 2008 federal income taxes paid by American corporations amounted to only 25.6 percent of their domestic income, according to the Congressional Budget Office. On their foreign income they paid much less.

E-mail: eporter@nytimes.com;

Twitter: @portereduardo

Article source: http://www.nytimes.com/2013/05/29/business/the-trouble-with-taxing-corporations.html?partner=rss&emc=rss

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In Tax Overhaul Debate, It’s Large vs. Small Companies

May 23, 2013 by Leave a Comment

Some of the biggest and most powerful companies in the United States are fighting for a cut in the official corporate tax rate, arguing that it is necessary to allow them to compete more effectively in the global market. But the nation’s millions of small businesses fear they will be the ones paying for it.

“We are in favor of comprehensive tax reform that includes both corporate and personal tax, but we are not happy with anything that raises the rate for us,” said Chris Whitcomb, the tax counsel for the National Federation of Independent Business, the leading small business lobbying and advocacy group, representing about 350,000 members.

The conflict, which in some ways is even larger than the controversial issue of how to properly tax multinational corporations on their global profits, arises because the vast majority of American businesses, including some large, well-known companies and prominent Wall Street firms, actually do not pay corporate taxes at all.

Beginning in earnest in the 1980s, millions of businesses shed their traditional corporate status to become what are known as pass-through companies. That led to a boon for business, but was a drain on the Treasury.

But what began as a typical Washington dispute between big and small business has been transformed into a fierce lobbying battle that pits some of the richest firms in the country against one another. Some big pass-throughs “are trying to conflate themselves with smaller pass-throughs,” said one official working on tax reform in Washington — so much so that they could be accused of “small business identity theft.”

Business executives have long complained that a traditional corporation’s profits are taxed twice, first at the corporate level, and then again on the dividends received by shareholders. Pass-throughs, by contrast, are allowed to distribute their profits directly to their owners and investors, who then pay federal taxes on their personal income tax schedule.

This arrangement, previously used almost exclusively by partnerships, very small businesses and the self-employed, proved especially attractive after the major 1986 tax overhaul, which cut personal rates below corporate ones. That spurred a vast migration to pass-through status, a shift that has continued up to the present day.

Of the 34 million business tax returns filed in 2009, the most recent data available, 32 million were pass-throughs, representing about 70 percent of net business income, compared with about one-quarter in 1980.

“Most businesses are pass-throughs,” said Eric Toder, institute fellow at the Urban Institute in Washington. “They dominate the business landscape.”

Companies that switched said the simpler, generally lower single-tax rules gave them a leg up and helped them grow.

McGregor Metalworking Companies, a family-owned business in Ohio and South Carolina, had 80 employees when it converted in 1986 and now has a work force of 370.

“It has been a real force for reinvestment,” said Dan McGregor, 69, chairman of the company, which has seven shareholders.

Even though the top personal income tax rate of 39.6 percent once again exceeds the maximum corporate rate of 35 percent, the pass-through arrangement remains attractive to companies like McGregor Metalworking, analysts say, by avoiding double taxation. And it is even more appealing to firms that are able to treat some of their income as long-term capital gains, which are taxed at no more than 20 percent.

In the 1990s, the introduction of “check the box” tax return procedures sped the growth of pass-through businesses. Other rule changes, allowing companies with more shareholders to qualify and affording investors increased protection against personal liability for their business’s debts, made pass-throughs even more popular — and not only among smaller companies.

Article source: http://www.nytimes.com/2013/05/24/business/in-tax-overhaul-debate-its-large-vs-small-companies.html?partner=rss&emc=rss

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Europe Pushes to Shed Stigma of Tax Haven With End to Bank Secrecy

May 22, 2013 by Leave a Comment

“Nothing is as it was before,” Prime Minister Jean-Claude Juncker told Parliament last month, explaining why, after years of resistance, Luxembourg had decided to start sharing information with foreign tax authorities about the money stashed in its banks. “Not everything has changed, but lots of things have changed. Other changes are necessary, or everything will change.”

The attention this week on the ability of Apple and other prominent American corporations to avoid corporate taxes through offshore tax arrangements obscures a perhaps more significant development, highlighted by Luxembourg’s abrupt retreat from banking secrecy: the relentless pressures being piled on opaque money centers around the world amid a sweeping global assault on tax evasion and the secrecy that enables it.

“Bank secrecy is a relic of the past,” said Algirdas Semeta, the European Union’s senior official responsible for tax issues. “Soon we will see the death of bank secrecy around the world.”

From the rain-swept avenues of Luxembourg’s capital to the sun-spangled lagoons of the British Virgin Islands in the Caribbean, the authorities are scrambling to shed the stigma of enabling tax cheats and to figure out how to change their secretive ways without driving away lucrative foreign clients.

The pressure, increased by the recent leak of a giant cache of confidential files relating to offshore havens, is “like a steamroller,” said Egide Thein, former director of the Luxembourg Economic Development Bureau.

How to keep this steamroller moving was the focus of a European Union summit meeting on Wednesday in Brussels. The gathering produced no momentous decisions but did prod Austria, the union’s last stalwart defender of banking secrecy, to accept the idea of sharing information about bank accounts held by foreigners — so long as countries outside the union, notably Switzerland, agree to do the same.

Austria and Luxembourg also gave a conditional pledge to, by the end of the year, sign onto an expanded program of automatic data sharing that would go beyond just banks to include trusts and foundations, which are widely used by wealthy Europeans to park and often hide money.

The European Commission, the union’s executive arm, has been pushing for years to enlarge the scope of financial information that is automatically shared among the bloc’s 27 member states. It has also pressed for a crackdown on “aggressive tax planning” by multinational companies like Apple, which investigators in Congress say avoided billions of taxes in America and elsewhere through an elaborate, globe-spanning web of companies revolving around outfits based in Ireland.

Ireland, which holds the European Union’s rotating presidency, has strongly supported measures to combat tax evasion, which is illegal, but has come under intense scrutiny and criticism in recent days for its role in enabling tax avoidance schemes. Prime Minister Enda Kenny, speaking Wednesday in Brussels, said that global tax rules “have not kept up” with economic changes in the digital era, but he rejected assertions by Senate investigators that Ireland gave Apple a special 2 percent tax rate. “Ireland does not do special deals or side deals with companies,” he said.

In many cases, both legal and illegal skirting of taxes occur in the same places — a global archipelago of mostly tiny “business friendly” outposts long anchored in secrecy and low or highly flexible tax rates.

Luxembourg, for example, has only 539,000 people but serves as the regional headquarters for a host of large companies that book their profits here rather than in the countries where they do business. It is also a major financial center whose 130 or so banks, mostly subsidiaries of major international institutions, held deposits of around $350 billion at the end of last year — about $650,000 per resident.

Article source: http://www.nytimes.com/2013/05/23/world/europe/europe-pushes-to-shed-stigma-of-tax-haven-with-end-to-bank-secrecy.html?partner=rss&emc=rss

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Creating Value: The Tax Implications of Starting a Business With Retirement Money

April 17, 2013 by Leave a Comment
Creating Value

Are you getting the most out of your business?

Last week I wrote about the risks of using retirement money to finance your business. I spent some time looking at a strategy called ROBS — rollover as business start-up — and came to the conclusion that although it is being done by thousands of businesses, it has yet to receive the full blessing of either the Internal Revenue Service or the Department of Labor. As a result, I would advise my clients to stay away from the strategy.

But there is another reason to be wary, and it might be even more important — it’s about how you will be taxed if you do manage to build a company using ROBS and sell it at a profit. The tax implications are significant, and I think the lessons are important regardless of how you choose to finance your business.

If you are going to use ROBS to finance a business, you must file taxes as a C corporation, and that is where the tax issue comes into play. That’s because when it comes time to sell the company, you will be taxed twice — first at the corporate level and then at the personal level. And this, of course, is why most closely held small businesses are subchapter S corporations, whose structure allows income to flow untaxed to the owners of the company, who then pay taxes individually but only once.

Here’s an example. Let’s look at what happens if you sell a C corporation for a $1 million gain without using a ROBS strategy.

Gain……………………………………………………………………. $1,000,000

Corporate taxes @ 35%…………………………………………….. 350,000

Gain after corporate taxes ………………………………………..   650,000

Personal taxes @ 20% (capital gains)…………………………. 130,000

Cash left after taxes…………………………………………………..  520,000

Thus, if you were the owner of this corporation you would have paid 48 percent in total taxes. Now, if this company had been financed through ROBS, you would not have paid 20 percent capital gains taxes at the personal level. Instead, the stock would have been owned through a 401(k) and you would have had to pay 39.6 percent ordinary income taxes. Here’s what that would have looked like:

Gain……………………………………………………………………. $1,000,000

Corporate taxes @ 35%…………………………………………….  350,000

Gain after corporate taxes…………………………………………   650,000

Personal taxes @ 39.6%……………………………………………  257,400

Cash left after taxes…………………………………………………… 392,600

As you can see, using a ROBS strategy increases the tax bite from 48 percent to a little more than 60 percent. And that’s my point: even if ROBS transactions are legal, the tax implications are significant.

Now, a ROBS promoter might object to this example and argue that the seller should do a stock sale rather than an asset sale. (Here’s the difference: with a stock sale, the buyer purchases the owner’s share of a corporation; with an asset sale, the buyer purchases individual assets of the company but the seller retains ownership of the legal entity.) And it’s true that with a stock sale, the taxes would be the same as they are on any stock that is bought and sold inside a qualified retirement plan. No taxes would be paid until money is withdrawn from the retirement plan, when the maximum rate would be 39.6 percent.

This might be a great idea except for one thing: buyers generally do not like stock sales. Buyers do not want to buy your liabilities, and they do not want to buy surprises that might not show up for years. If you insist on a stock sale, you may have a difficult time selling your business.

But again, the main thing I want to emphasize is that it makes sense to think about how you are going to get out of a business before you decide to get in. Seemingly small decisions can have big consequences down the road.

What do you think? Would you still do a ROBS transaction knowing what the tax cost is likely to be?

Josh Patrick is a founder and principal at Stage 2 Planning Partners, where he works with private business owners on creating personal and business value.

This post has been revised to reflect the following correction:

Correction: April 17, 2013

In a previous version of this post, I mistakenly suggested that an alternative to a ROBS strategy would be to roll the funds from an existing retirement plan into a new company and then borrow up to 50 percent of your retirement account balance to finance the new business.

But this actually won’t work. The reason it won’t work is that there is a limit to how much you can borrow from a retirement plan at one time. The most you can borrow in any calendar year is $50,000, which makes this an impractical way to start a business. I apologize for the error.

Article source: http://boss.blogs.nytimes.com/2013/04/17/the-tax-implications-of-starting-a-business-with-retirement-money/?partner=rss&emc=rss

Filed Under: Small Business Tagged With: ,

Starbucks Offers to Pay More British Tax Than Required

December 6, 2012 by Leave a Comment

“Having listened to customers and to the British public, Starbucks in the U.K. will be making changes which will result in the company paying higher corporation tax in the U.K. — above what is currently required by law,” the company said in a statement.

Starbucks said that in 2013 and 2014 it would refrain from claiming certain tax deductions that helped reduce its tax bill in Britain to nothing over the past three years. The company said it would pay taxes over the next two years even if it does not post a profit in Britain, where it has more than 700 shops.

The tax practices of Starbucks, along with those of other U.S. multinational companies, including Google and Amazon, have come under intense scrutiny in Britain in recent weeks, even as the government has announced plans to extend its fiscal discipline for another year.

The chairman of the Public Accounts Committee of Parliament, Margaret Hodge, has accused the companies of “immoral” behavior and protesters have called for a boycott of Starbucks.

U.K. Uncut, a group that is campaigning against the government’s fiscal policies, has called for protests outside Starbucks stores on Saturday. The group dismissed the latest announcement from the company as a ploy.

“Offering to pay some tax if and when it suits you doesn’t stop you being a tax dodger,” Hannah Pearce, a spokeswoman for U.K. Uncut, said in a statement. “Starbucks have been avoiding tax for over a decade and continue to deny that it paid too little tax in the past. Today’s announcement is just a desperate attempt to deflect public pressure.”

In its 14 years of doing business in Britain, Starbucks has paid a total of £8.6 million, or $13.8 million, in corporate taxes there. The company has reduced its tax bill in Britain by channeling revenue through other company subsidiaries in jurisdictions where tax rates are lower. One unit in the Netherlands, for example, receives royalty payments from Britain.

Similar tax-reduction strategies are employed by many multinational companies. But Starbucks said that it would not make such transfers over the next two years.

“Specifically, in 2013 and 2014 Starbucks will not claim tax deductions for royalties or payments related to our intercompany charges,” the company said.


Article source: http://www.nytimes.com/2012/12/07/business/global/07iht-uktax07.html?partner=rss&emc=rss

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The Caucus: Romney’s Taxes Compared With Everyone Else’s

September 21, 2012 by Leave a Comment

The Romney campaign revealed Friday afternoon that Mitt Romney and his wife, Ann, paid a 14.1 percent effective federal tax rate in 2011, paying $1.9 million in taxes on $13.7 million in income, much of it from investments. (That $13.7 million in income most likely puts him in the top 0.01 percent of earners, by the way.)

Where does that effective tax rate put him in the universe of taxpayers? The Romneys paid a higher effective tax rate than the average middle-income American, though a significantly lower rate than the average rich, or very rich, American.

According to the nonpartisan Tax Policy Center, the middle quintile of taxpayers – earning between $33,542 and $59,486 a year – had an effective direct federal tax rate of about 12 percent in 2011. The top 1 percent of earners, making more than $532,613 a year, paid a direct federal tax rate of about 22.7 percent. And the top 0.1 percent of earners, making more than $2,178,886 a year, paid a direct federal tax rate of about 21.4 percent.

(We’re just using income, employee-side payroll and estate taxes in this comparison. A fuller picture would include state and local, employer-side payroll and corporate taxes.)

Still, the Romneys revealed that they paid more taxes than they really owed, pushing their effective federal rate higher. The couple made more than $4 million in charitable donations in 2011, but claimed a deduction for only $2.25 million of those donations “to conform to the governor’s statement” that he “paid at least 13 percent in income taxes in each of the last 10 years.”

In light of that, expect Mr. Romney to take some heat for this statement, which he made to ABC News in July: “ I don’t pay more than are legally due and frankly if I had paid more than are legally due I don’t think I’d be qualified to become president. I’d think people would want me to follow the law and pay only what the tax code requires.”

Follow Annie Lowrey on Twitter at @AnnieLowrey.

Article source: http://thecaucus.blogs.nytimes.com/2012/09/21/romneys-taxes-compared-with-everyone-elses/?partner=rss&emc=rss

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Economix Blog: More on Mitt Romney’s Tax Rate

January 20, 2012 by Leave a Comment

There are any number ways to calculate a household’s tax rate. You can look at just the federal income tax and conclude that almost half of Americans don’t pay taxes, or look at all taxes and conclude that a vast majority of Americans do pay taxes.

DAVID LEONHARDT

DAVID LEONHARDT

Thoughts on the economic scene.

To my news analysis explaining that most households actually pay a lower federal tax rate than 15 percent — the rate Mitt Romney, the Republican presidential candidate, says that he pays — there are two postscripts worth adding:

First, I focused on direct taxes. If you also include indirect taxes — mainly corporate taxes, effectively paid by stockholders — Mr. Romney’s rate rises higher. On average, the top 1 percent of earners pay about 10 percent of their income in corporate taxes, according to the Congressional Budget Office.

Companies officially pay these taxes. But by reducing the after-tax earnings of the company, the taxes ultimately come out of the pockets of the company’s owners. Economists, with good reason, like to apportion all taxes to people, rather than to an entity like a corporation.

Second, most of the article focused on federal taxes, not state or local taxes (for which the data is thinner). Because Mr. Romney’s income is so high, he pays relatively little of it in state and local taxes. A middle-class or poor family would pay a greater proportion.

These two factors obviously point in different directions. So if you widened the lens beyond direct federal taxes — to all taxes, including indirect, state and local taxes — the conclusion would likely be similar. Mr. Romney does not pay a lower tax rate than most Americans. He also doesn’t pay a much higher tax rate, despite being much more affluent.

Article source: http://feeds.nytimes.com/click.phdo?i=f3da1aa10e8b7e3e462ef5e19232256a

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Economix: The Logic of Cutting Corporate Taxes

April 8, 2011 by Leave a Comment

Today's Economist

Laura D’Andrea Tyson is a professor at the Haas School of Business at the University of California, Berkeley, and served as chairwoman of the Council of Economic Advisers under President Clinton.

Corporate taxes –- or rather their absence –- have jumped to the top of the news in recent weeks, even drawing humorous commentary from Jon Stewart and Bill Maher. Many Americans are outraged to learn that some profitable American corporations pay little or no taxes in the United States, especially when corporate profits enjoyed their fastest growth ever in 2010.

Shouldn’t the government raise the corporate tax rate to require corporations to contribute their “fair share” to deficit reduction and to enhance the progressivity of the tax system? The answer is no.

In today’s world of mobile capital, increasing the corporate tax rate would be a bad way to generate revenues for deficit reduction, a bad way to increase the progressivity of the tax code and a bad way to help American workers and their families.

After the 1986 tax overhaul, the United States had one of the lowest corporate tax rates among the advanced industrial countries. Since then, these countries have been slashing their rates both to attract investment by American and other foreign companies and to discourage their own companies from shifting operations and profits to foreign locations offering even lower tax rates.

KPMG Corporate and Indirect Tax Rate Survey, 2008, published in “Growth and Competitiveness in the United States: The Role of Its Multinational Companies,” McKinsey Global Institute, June 2010.

The resulting “race to the bottom” in corporate tax rates has made the United States a less attractive place for both domestic and foreign investments, and that has encouraged American multinational companies to shift more of their income abroad, in ways permitted by the United States tax code.

The United States now has the highest corporate tax rate of all developed countries –- and is alone in its attempt to impose taxes on the worldwide income of its resident corporations. All other developed countries and most major emerging countries have adopted a territorial system that exempts most foreign income of their resident corporations from taxes.

Some critics, like Jeffrey Sachs, say the United States should resist participating in the race to the bottom and should champion a multilateral agreement that increases taxes on corporate income. My fellow Economix blogger Nancy Folbre made that same point on Monday.

But there is no sign that other countries are interested. The European Union can’t even agree on harmonizing the corporate tax rates of its member nations. In continuing negotiations over an European Union bailout package, Ireland has steadfastly rejected French and German demands to increase its low corporate tax rate (12.5 percent, the lowest rate in the European Union and one of the lowest in the world).

And Ireland has been wise to do so: its corporate tax incentives are credited with attracting significant amounts of foreign direct investment by European and American companies that fostered the Irish development miracle of the last decade.

The race to the bottom in corporate tax rates reflects intensifying competition among countries for mobile capital and technological know-how to support jobs and wages for immobile workers.

For many years, the conventional wisdom was that the corporate income tax was principally borne by the owners of capital in the form of lower returns. Now, with more mobile capital, workers are bearing more of the burden in the form of lower wages and productivity as investments move around the world in search of better tax treatment and higher returns.

In this environment, a high corporate tax rate not only undermines the growth and competitiveness of American companies; it is also increasingly ineffective as a tool to achieve more progressive outcomes in the taxation of capital and labor income.

The Obama administration and many members of Congress are calling for a significant reduction in the corporate tax rate to promote jobs and competitiveness, as well as a move to a territorial tax system.

At the same time, they are searching for ways to broaden the corporate tax base so that corporate tax revenues will either increase or remain unchanged, even with a lower tax rate. This search is proving difficult and may well produce an undesirable result.

A significant “revenue neutral” reduction in the corporate tax rate would require a significant broadening of the corporate tax base, and that in turn would require scaling back or eliminating three large corporate tax expenditures that reduce the cost of capital and encourage new investment and job creation in the United States: accelerated depreciation, the domestic manufacturing production deduction and the research and development tax credit.

Cutting these items to “pay for” a reduction in the corporate tax rate would increase the cost of new investments in the United States and could impose higher burdens on American workers, in the form of forgone productivity and wage growth. (For a discussion of the pros and cons of different options to reform the corporate tax system, see the President’s Economic Recovery Advisory Board’s Report on Tax Reform Options: Simplification, Compliance and Corporate Taxation, published in August 2010.)

More promising ways to pay for a significant reduction in the corporate tax rate have been proposed.

Prof. Michael Graetz of Columbia Law School told the Senate Finance Committee that the shortfall in corporate tax revenues resulting from a cut in the corporate tax rate could be offset by the imposition of a corporate withholding tax on dividend and interest payments to shareholders and bondholders.

Many countries that have reduced their corporate tax rates have raised taxes on these groups; the United States has been going in the opposite direction.

According to a recent study by Rosanne Altshuler, Benjamin H. Harris and Eric Toder, restoring tax rates on dividends and capital gains to their pre-1997 level of 28 percent could finance a reduction in the federal corporate tax rate to 26 percent from 35 percent.

Such a change would both reduce the incentive for corporations to move investments abroad and increase the progressivity of tax outcomes by shifting more of the burden of corporate taxation from labor to capital owners.

Professor Graetz, and more recently, William G. Gale and Mr. Harris have proposed introducing a value-added tax to reduce the deficit and to finance a reduction in the corporate tax rate.

Most countries that have reduced their corporate tax rates have a value added tax that accounts for a significant share of their tax revenues. To offset the regressive effects of a value added tax, countries have used lower value-added-tax rates on items like food, health care and education, as well as cash subsidies for poor households.

I believe that a federal value added tax with such offsets should be considered as part of a balanced multiyear deficit-reduction package that includes a sizeable reduction in the corporate tax rate.

Many Americans who are outraged that American corporations pay little or no corporate tax would be equally outraged to learn that more than 50 percent of all business income is earned by partnerships, sole proprietorships and S corporations, many of which are very large and profitable and enjoy the same legal benefits as regular corporations and do not pay corporate taxes.

Broadening the corporate tax base to include more business organizations with corporate characteristics would allow for a revenue-neutral reduction in the corporate tax rate that would make the United States a more attractive location for both foreign and domestic investments, with benefits for American workers.

The United States needs a significantly lower tax rate on corporate income, not a higher one.

Article source: http://feeds.nytimes.com/click.phdo?i=885df0023a152089d3d3e3ed768b05ee

Filed Under: Economy News Tagged With: , ,