Corporate Tax Inversions and Politics

Jack Lew and President Obama are talking a lot about tax inversions.  Mark Cuban (probably no fan of the current administration) tweeted:

I disagreed with him.  I don’t think that US companies should be held up to a lynch mob for moving.  I guess the alternative would be to set up a foreign holding company and park every bit of profit overseas to avoid tax.  A friend of mine is one of the world experts in inversion.

I do agree with Mr. Cuban that there are great investment choices in the US.   It’s the most innovative country in the history of mankind.  There are great large companies here, and great small startups.  Plenty of ways to make money.

But the broader point is that currently, the administration is using corporate tax rates as a “MacGuffin”.  This is all something designed to get people to focus on something other than the administrations total failure in virtually every policy.  Its economic stimulus, total fail.  Its foreign policy, looks like a total fail.  Its regulatory policy, total fail.  Its tax policy, total fail.

It’s worth reminding people that corporations only pay 9% of the total tax receipts.  It’s individuals that make up the bulk.  It’s really the top 5% of tax payers that carry the water for the rest of America.

If we are serious about reforming the corporate tax code, I am all for it.   Currently, the way we tax people in the US is by enforcing normative economic theory by gerrymandering the tax code.  This creates an incentive for corporations to hire lobbyists to talk to government officials about special breaks.

Want to get money out of government?  Reform the tax code.  The tax code is a huge driver of crony capitalism.  When politicians pass a tax, they immediately turn around and hold out their hand to see “what they can do to help”.

It’s also worth noting that corporations don’t pay taxes.  They are tax aggregators.  Economist Robert Barro makes a great point when he says,

Much more focus should be on incentives for people and businesses to invest, produce and work. On the tax side, we should avoid programs that throw money at people and emphasize instead reductions in marginal income-tax rates — especially where these rates are already high and fall on capital income. Eliminating the federal corporate income tax would be brilliant. On the spending side, the main point is that we should not be considering massive public-works programs that do not pass muster from the perspective of cost-benefit analysis. Just as in the 1980s, when extreme supply-side views on tax cuts were unjustified, it is wrong now to think that added government spending is free.

Eliminating the corporate tax rate would eliminate the lobbying for all kinds of things that go along with it.  At the same time, all subsidies for corporations and special write offs should be eliminated too.   Dropping the rate to 0% isn’t done in a vacuum.  If we totaled up all the subsidies we pay corporations, it’s a lot larger than the 9% revenue we’d be losing.

People tend to look at the tax code through the lens of accounting.  “How are you going to pay for that?” is the question most often asked.  It’s a stupid question.   Dropping tax rates creates massive growth.

The multiplier effect of private investment into the economy is greater than 1. When taxes are reduced, for every 1% drop in tax rates, a corresponding 3% increase happens to GDP.

Suppose corporate tax rates were 0%.  Corporations would be free to invest in production in the US.  Foreign corporations would domicile here.  Corporate hiring would pick up creating more individual tax payers.  Because there would be zero tax, corporations wouldn’t be double and triple taxed on issuing dividends, and balance sheet cash could pass through into the hands of shareholders.  Money in the hands of individuals creates economic opportunity.

If corporate tax rates were 0%, corporations wouldn’t have to allocate resources to fund accountants, lawyers, and pay internal personnel to figure out the best operational way to avoid taxes.  All that money and intellectual firepower could be diverted into figuring out how to create value for customers.

Ignore the politicians.  They have other goals other than GDP growth.  They only care about power, and doling out favors.

 

tip of the hat to Instapundit.


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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