Corporate Taxes: More Trouble than They’re Worth

Image from http://economics21.org
Image from http://economics21.org

A Guest post from Robert Short Sr.

The ofttimes ignored question when tax policy is discussed is, “What is the purpose of Taxation?”, in particular, “What is the purpose of this tax?” The question is important because the common sense answer is to fund the government. Yet most of the time politicians and others don’t even mention this. The normal reason given for a certain tax rate is either to “make everyone pay their fair share”, “punish the greedy wall street leaches”, or “unleash America’s job creators”.

So which is it? Well actually it’s all of the above. Our tax policy is the result of a continual shift in public sentiment. When the public is focused on other issues, which to be honest is north of 99.9% of the time, those with a high degree of interest in the tax code are able to lobby, reason, beg, and bribe their own carve outs into law. But once these carve outs hit a critical mass the public rebels, demanding an end to Crony Capitalism and the corrupt officials who partake. We get inundated with lists of companies that didn’t pay a dime in taxes (a note, these lists almost always only mention income taxes, as a company paying billions in other taxes kinda takes away from the reports message) and so on. This goes on until another soccer ball distracts the public and the process repeats, over and over again.

Not only is this cycle stupid, but it leads to greater corruption and huge amounts of waste. Logic dictates that a company will support any tax cut or loophole that saves it more in taxes than it costs to comply with. Especially since the company can deduct the costs of complying with the carve out from their remaining taxes. Whole industries have come into being merely to facilitate this compliance. Many people make all of their taxable income by helping other people minimize their taxed income. Leading to, by some estimates, up to a million people who are motivated to maintain or increase compliance costs.

According to the IRS, American companies spend over 4.4 billion dollars a year just filing their tax returns, and this is the smallest cost of compliance. According to a study done by Jason J. Fichtner and Jacob Feldman of the Mercatus Center at George Mason University, the total cost of compliance is well over 200 billion dollars a year. To put this in perspective, the corporate tax compliance cost is larger than the economy of South Carolina, larger than the economies of 23 states.

So is there a way to save those billions, get rid of most of the corruption in Washington, “make everyone pay their fair share”, “punish the greedy wall street leaches”, AND “unleash America’s job creators”?

Yes, Virginia, there is a Santa Claus.

End corporate taxes and tax the owners of the companies instead. Rather than taxing profits companies make when they earn them, tax the profits when they are given to the owners, either through dividends or through stock buybacks.

I’ll get to the numbers in a second, but first I want to focus on the aforementioned goals. For starters obviously the switch would eliminate the compliance costs associated with the current tax scheme, and as a bonus it would transfer the compliance obligation to one of the cheapest, in terms of compliance, taxes, the Capital Gains Tax.

Such a change would also upend the current Crony environment of Washington. The reason corporate lobbying is so pervasive is that over 50% of Americans own stock, mostly through retirement accounts, and if someone asked them would they rather the value of their investment go up or down, every single one of them would say up. So companies have a great incentive to make that happen. But if the taxes for corporate profits were transferred to the owners, their incentives would no longer line up as neatly, and it would be much harder to organize an effective lobbying effort to create new carve outs, not impossible but much, much harder.

What’s that I hear? A Bernie Sanders supporter yelling about how this is a give away to big business? Fear not my friend, this plan will ensure that “everyone pays their fair share”. Currently if you are a multinational corporation you can basically pick your tax rate by manipulating where your income is ‘earned’ (a future post will go into this), but if you are a family owned business, a small manufacturer, an Etsy mogul, you cannot, you earn your income here in the US and pay the full amount of taxes. Under this plan the multinational and the mom and pop pay the same amount. The mom and pop are also no longer disadvantaged by their inability to hire someone like me full time to find and exploit the carve outs, like the GE’s of the world can.

Now diverse contingents of folks, everyone from the last occupier on Wall Street to the ardent Ron Paul fans, are thinking what about those who gamed the system. Those who took millions from the government only to screw over the workers? Well, this system fixes much of that. Most Corporate Welfare is not direct payouts; rather it is handled through what are called Tax Expenditures. These have the advantage of not showing up on the budget as actual spending items but having the exact same effect. This plan eliminates every single one of them. Then if Congress wishes to support a private company, it must do so in full sight of the American people.

Additionally, this plan punishes greed. If someone wants to buy a company and bleed it dry, without regard to the workers or common decency, they still can, but they will pay through the nose in taxes. But if someone chooses to buy a company, manage it correctly, and reinvest their profits into the company, they pay no taxes, and get to grow their investment tax deferred, essentially turning every company into a 401(k).

This piece dovetails with the oft repeated goal of “unleashing America’s job creators” (ignoring that it is worker spending that creates jobs in a market economy, not investment from on high). Since the job creators do not pay any taxes on their profits while they are creating jobs, they are incentivized to continue doing so. Only when they choose to take income out for their own use do they get hit with a tax bill. This allows them 100% control over how much they pay in taxes.

Now for the actual numbers, the part of the show where Larry comes out and sings a silly song, (sorry was listening to my kids’ movie in the background). Currently the federal government takes in 300 billion dollars in corporate taxes. Meanwhile, Michael Thompson, Managing Director and Chairman of S&P Investment Advisory Services at S&P Capital IQ the top 500 companies in the US, known as the S&P 500, give back over one trillion dollars in dividends and stock buybacks this year. That one trillion is not the total amount, only the fraction that those 500 companies make up, and that is also after they paid their share of corporate taxes and compliance costs. So this plan could be revenue neutral if all investment income was treated as regular income, assuming no economic growth caused by this plan.

Oh and it would also allow for the repatriation of the two trillion dollars hiding overseas from US taxes (again a topic that a future post will discuss).

But that’s just my two cents.

R.W.T. Short, Sr. is an accountant and veteran of Operation Iraqi Freedom. He is a civil libertarian and Veteran’s Rights activist. He lives in Lynchburg, Va. with his wife of eight years, their three children, their dogs, and a colony of former stray cats his daughter adopted. He can be reached via email at Robert.W.T.Short.Sr@GMail.com and on Twitter at @RobertShortSr.

Too Fast, Too Spurious

VC Note:  Recently, a press secretary from the Republican National Committee reached out to me as a result of my work on the Virginia Conservative.  Over the last several weeks, I’ve gotten several articles from them and, from time to time, some of their pieces will likely appear here.  Today, I wanted to share their response to Terry McAuliffe’s latest ad regarding the transportation tax bill.

For the record, here is the ad in question:

And here is the Republican National Committee response:

Democrats And Virginia Legislators Catch Terry McAuliffe Speeding Away From The Truth In His Latest Campaign Ad

Terry McAuliffe’s Campaign Is Airing An Ad That Claims He Played A Role In The Passage Of A Transportation Bill In Virginia. “McAuliffe’s campaign ad that began airing last week details McAuliffe’s behind the scenes efforts to lobby Democrats in the General Assembly to vote for the historic, compromise transportation funding package. The ad infers that McAuliffe’s efforts helped secure passage of the measure.” (Todd Allen Wilson, “Sen. Stosch Says McAuliffe Didn’t Help Transportation Deal Pass,” Daily Press, 5/28/13)

Democratic State Sen. Charles J. Colgan, On McAuliffe’s Participation In Negotiations Over Virginia’s Transportation Bill: “When I Was There, He Didn’t.” “Sen. Charles J. Colgan, Manassas Democrat and the longest-serving member of the Senate, was an informal adviser to the conferees as they hashed out differences between the House and Senate versions. But Mr. McAuliffe never spoke to him about it, he said Tuesday. ‘When I was there, he didn’t,’ Mr. Colgan said.” (David Sherfinski, “Virginia Governor’s Race Turns Harsh With McAuliffe’s Soft Campaign Ad,” The Washington Times, 5/28/13)

Democratic State Senator J. Chapman Petersen Said “He Never Spoke With Mr. McAuliffe.” “J. Chapman Petersen, Fairfax Democrat and one of two Northern Virginia senators to vote against the plan, said he never spoke with Mr. McAuliffe.” (David Sherfinski, “Virginia Governor’s Race Turns Harsh With McAuliffe’s Soft Campaign Ad,” The Washington Times, 5/28/13)

State Senator Petersen: “I Don’t Know If He Tried To Reach Me.” (David Sherfinski, “Virginia Governor’s Race Turns Harsh With McAuliffe’s Soft Campaign Ad,” The Washington Times, 5/28/13)

A Senate Aide, On McAuliffe’s Participation: “There Was No Contact Between Terry McAuliffe And Our Office And Nobody Thought He Had Any Impact On The Outcome.” (David Sherfinski, “Virginia Governor’s Race Turns Harsh With McAuliffe’s Soft Campaign Ad,” The Washington Times, 5/28/13)

A Democratic Aide Claimed “She Wasn’t Aware Of Any Direct Lobbying Efforts From Mr. McAuliffe On The Bill.” “One Democratic aide acknowledged that Mr. McAuliffe attended a private caucus meeting but that she wasn’t aware of any direct lobbying efforts from Mr. McAuliffe on the bill.” (David Sherfinski, “Virginia Governor’s Race Turns Harsh With McAuliffe’s Soft Campaign Ad,” The Washington Times, 5/28/13)

“State Sen. Walter Stosch, R-Henrico, Said Claims In A Television Ad By Democratic Gubernatorial Candidate Terry McAuliffe Are Absurd.” (Todd Allen Wilson, “Sen. Stosch Says McAuliffe Didn’t Help Transportation Deal Pass,” Daily Press, 5/28/13)

State Senator Stosch, A Conferee On The Bill: “Terry McAuliffe Was Not A Participant Nor Did He Have Any Influence In The Development Or Negotiation Of The Transportation Bill.” “But Stosch, who chairs the Senate finance committee and was on the conference committee of House of Delegates and Senate lawmakers who hashed out the final deal, said McAuliffe is taking credit that he shouldn’t. ‘Terry McAuliffe was not a participant nor did he have any influence in the development or negotiation of the transportation bill,’ Stosch said in a press release Tuesday.” (Todd Allen Wilson, “Sen. Stosch Says McAuliffe Didn’t Help Transportation Deal Pass,” Daily Press, 5/28/13)

Going After The Governor

Virginia Governor Bob McDonnell
Virginia Governor Bob McDonnell

With the blessing of Governor Bob McDonnell, Virginia’s General Assembly recently passed a transportation bill has upset huge numbers of conservatives across the state.  Labeled as the largest (or second largest) tax increase in Virginia history, many activists see the move as an outright betrayal of McDonnell’s election pledge to find other ways to fund transportation without a tax hike.

Rumors circulate that after leaving office in November, the governor will set his sights on either the 2014 U.S. Virginia Senate seat or even the 2016 presidency.  In order to thwart McDonnell’s higher political ambitions, a group called the Patriot SuperPAC recently ran an ad in Iowa warning voters in that state that McDonnell is not the fiscal conservative he pretends to be.  Today, the PAC released another ad targeting the people of New Hampshire.

Although the 2016 presidential race will not begin in earnest for at least another year, these sorts of messages clearly illustrate an important reality.  Bob McDonnell has upset a whole lot of Virginia conservatives and his effort to cement a legacy for himself through transportation tax hikes likely makes it almost impossible for him to ever win back the support of this key constituency.

Stimpson Condemns Massive Transportation Tax

Susan Stimpson at the Middletown Forum
Susan Stimpson

Earlier today, Susan Stimpson, Chairman of the Stafford County Board of Supervisors and Republican candidate for lieutenant governor, offered the following strongly worded statement regarding the passage of the enormous new transportation taxes.

Governor McDonnell & Speaker Howell are dead wrong promoting & passing a $6 billion tax increase last week…

I just received an email from the Governor that leaves me flabbergasted. It brags about billions in new taxes. It even directs people to look at the spending projects in their area! It sounds like a White House press release. I was half expecting it to conclude with an offer for a free cell phone!

Republicans are supposed to be about cutting taxes, cutting spending and reducing the size of government—like our current leadership in Richmond promised us they would do when we were working hard to elect them.

Instead they abandoned our party’s principles by raising taxes and paving the way for Obamacare.

Do we or do we not believe that a restrained and limited government is what allows the most freedom and prosperity?

Speaker Bill Howell and Governor McDonnell are friends. But they could not be more wrong. And they could not have failed us at a more critical time.

There has been a long, unsettled battle within the Republican Party in Virginia on whether or not government has enough money. It has played out in 2004, 2007 and now. Each time, Republican leadership has taken the side of “not enough taxes” instead of providing the vision and leadership toward a restrained government. How much more can we bear?

It’s time to end this battle decisively with New Leadership committed to the principle that Virginians are over-taxed.

As Lieutenant Governor, I will not only work tirelessly to advance a conservative agenda in the General Assembly, but I will work relentlessly for authentic conservative majorities in the House and Senate.

I have talked to Republicans today who are absolutely disgusted with our Party. They are sick and tired of being sold out. The Republican Party itself is at stake in Virginia, and if we don’t act and restore our Party to that of lower taxes and smaller government, we risk losing faithful Republicans and independent voters. While Democrats are proudly stating they stayed committed to their values and achieved higher taxes and Medicaid expansion, Republicans failed to lead and they rolled. And we control both Houses and the Governor’s office!

The time to act is now. As Lieutenant Governor, I will fight for tax cuts, spending cuts and smaller government as I have done in Stafford County, and I will lead an effort to elect principled, tax cutting conservatives to the House of Delegates and State Senate.

VC thoughts:  Most conservative activists across the state are severely upset with both Governor Bob McDonnell and the Republican-controlled General Assembly for what amounts to one of the largest tax increases in state history.  I applaud Susan Stimpson for taking a firm and unapologetic stand on this important issue.

Class warfare makes bad economics

Guest post by Daniel Wilson

In the name of class warfare politics, President Obama released a budget with $1.7 trillion in tax hikes over the next decade targeting successful earners, including small businesses, corporations and entrepreneurs. These taxes may only apply to individuals and businesses earning more than $200,000 a year, but will adversely affect every American, including college students.

In a jobless recovery with over 13 million Americans out of work, the last thing you want to do is impose higher marginal tax rates on job creators. Around 75 percent of tax filers in the highest tax bracket report business income, according to the Tax Foundation. [1] Higher taxes on businesses will most certainly destroy jobs. Businesses will have less after-tax income to expand production and employment. In addition, the incentives to make new investments in potential breakthroughs are minimized since you’re asking investors to take risks for a diminished rate of return from inflated confiscatory tax rates.

Take a look at the capital gains tax which Obama wants to raise from 15 to 24 percent. Capital gains taxes are paid whenever you sell an asset, such as a bond or a stock, for a profit. Higher taxes on capital gains will miss allocate resources by encouraging consumption over investing. Since investments are now being taxed at a higher rate, consumption becomes more attractive. Currently, the U.S. economy desperately lacks capital investments and way over consumes, so this only worsens that imbalance. Also, a higher capital gains tax chases capital overseas to countries like Switzerland that have no capital gains tax at all, destroying American jobs in the process. Lastly, everybody who owns stocks, which is roughly half of all Americans, will have a devalued portfolio from a higher capital gains tax. The higher tax lowers the reward from owning a stock, which then reduces the demand for stocks, causing the entire stock market to be worth less. Since savings and investments are the key to long-term economic growth the capital gains tax should be abolished, not raised.

Even though most economists believe higher taxes retard economic prosperity, the Obama administration is sold on the belief that the rich in this country, such as Warren Buffett and  Mitt Romney, need to pay an elevated tax rate. Obama wrongfully claims that very wealthy  individuals earning their income through capital gains and dividends get off with a lower tax rate than a secretary. This common fallacy completely ignores the double taxation of corporate income. Capital gains and dividends are taxed at a preferential rate of 15 percent because that same income has already been taxed at a rate of 35 percent at the corporate level. In other words, when a corporation earns a profit it has to pay corporate taxes on its earnings and then when the retained earnings are distributed to shareholders through dividends the income is taxed again at a rate of 15 percent.  In actuality, as The Wall Street Journal recently pointed out on January 27, 2012, Romney and Buffett have a tax rate closer to 40 percent.

As far as the rich not paying their fair share, the top 1 percent pays nearly 40 percent of all the income taxes while the bottom 45 percent pays nothing, according to the IRS. Also, a study by the OECD in 2008 showed that the richest 10 percent of households in the United States have the highest ratio of income taxes paid to the share of income earned, giving the U.S. the most progressive income tax system in the industrialized world.

Higher taxes on productive behavior is detrimental for society as a whole, living standards and economic growth become compromised when innovations and hard work get penalized by draconian tax rates. The rich already pay more than their fair share, and asking them to pay additional taxes will only derail the economy.

 


[1]
[1] http://www.taxfoundation.org/files/sr185.pdf

Daniel Wilson is a senior who is majoring in economics at James Madison University.

Why Vote for Bob McDonnell?

Recently a reader of this blog asked me, “Josh – If you’re a Ron Paul conservative, why in the world are you supporting Bob McDonnell?  Dr. Paul is hardly enthused w/ McDonnell…”  It is certainly a fair question to ask. Why should I, as a constitutional conservative, support Bob McDonnell? Some might say that I should because he is the Republican candidate.  Although I typically support Republicans over Democrats, it is because of their principles, not simply their party affiliation.  We all know Republicans, like Arlen Specter (formerly a Republican) or Lincoln Chafee, with whom we agree little politically.  Principles and principles alone must be our guiding factor.  That having been said, what principles link both Bob McDonnell and myself?

Both the abortion issue and the second amendment are very important to me.  While one defends the lives of the most defenseless among us, the other protects our property and very freedom against the potential tyranny of our neighbors and the government.   I believe that Bob McDonnell upholds these same values and I’ll share with you a video clip about these issues.

How about taxes?  Obviously, in order to shrink the size of government we must exercise fiscal restraint.  Bob McDonnell has demonstrated his resolve on many occasions throughout his political career.  When I spoke to Delegate Brenda Pogge (Yorktown-96) about conservative support for Bob McDonnell, she pointed out, “Bob was also the Chief sponsor of legislation to kill the death tax.  Bob is definitely a conservative who believes in less govt.  He led the legislation in the house on most of the reforms initiated under George Allen.  Welfare to work comes immediately to mind.  His record will reflect that he voted over 50 times to cut taxes and has never voted to increase them.”

Need more? Try checking out the NetRoots Supporters’ Debate at Common Sense for Virginia on September 12.