Corporate Taxes Do Make a Difference

A friend of mine works for Ernst and Young.  He is an international expert on corporate tax policy.  He has been immersed in it for almost his entire career.  When clients ask, he takes them to better corporate tax jurisdictions.  It’s not something he loves to do.  Obviously, as an American he’d much rather keep those corporates in America.  But, America is out of step and so corporate heads have moved for the benefit of their shareholders.

The other thing American corporates have done is set up subsidiaries overseas to avoid taxes.

We have seen American corporates leave high tax states like Connecticut for low tax states like Texas, Tennessee and Florida.  David Booth relocated his investment firm from California to Texas and said he was 10% up on any investment firm that was HQ’ed in New York.

All this is expensive.  It takes resources away from a business.  Millions are spent by both corporates, small business and individuals each year to structure transactions to avoid taxes.  What if that money was put into production?  What if that money was put into payroll?  What if that money was put into dividends?

We’d be better off.

I know there are a lot of people that hate corporate America.  It’s pretty easy to satire a corporation.  The truth is they exist because they are super efficient and get things to market to solve problems for people better than any other way.

I am all for ending corporate subsidies.  I don’t see any particularly good reason for American taxpayers to subsidize all the different things they subsidize.  We pay a peanut subsidy and peanut farmers over produce.  To hold prices up, the government buys peanuts to keep them off the market.  It adds around fifty cents to every jar of peanut butter.  Virtually every single cash crop in America is subsidized in some way.  So are oil and gas companies.  So are a lot of big companies.

At the same time, Milton Friedman was 100% correct when he made the case for a 0% corporate tax rate.  Corporations do not pay taxes no matter what the rate is, they aggregate them.  This means they charge a higher price for goods and services than they otherwise would.  It means that they pay their employees less than they other wise would.  It means they don’t increase production as much as they otherwise would.  The real person that pays the corporate tax is the consumer, not the company.

If we made the corporate tax zero the knock on effects would be these depending on the market, the competition and typical business factors

  • Lower prices
  • Higher wages
  • increased dividends
  • Increased production by increased investment in property, plant or equipment

There is an untold amount of US corporate money in banks overseas.  One corporate treasurer I spoke with thinks 3+ trillion. If they drop the tax rate, all of that money will not return to the US.  Foreign governments have regulations for foreign companies that require them to keep cash in their banks if they want to do business in their country.  Maybe a third of that cash would return.

Even if a third of it returns, it’s a net positive.  That means there is more cash in US banks to lend out to US projects.

Lower corporate taxes will also change the way the finance department inside corporations look at mergers and acquisitions.  It changes the math.  Some acquisitions that were rejected or not undertaken might happen.  That might help startup investors.

Startups typically don’t pay taxes because they don’t make money.  However, lowering the corporate tax could help startups that consider corporations as customers. Their target customers will have more money to spend.

Trump made a speech the other day advocating for a lower corporate tax.  I am all for it.  I also think they should get rid of all the subsidies at the same time.

  • awaldstein

    I don’t hate corporate American at all.

    I think taxes are out of whack.

    I don’t support anything without details. Least of all this plan.

  • JLM

    .
    Corporate taxes are a COGS (cost of goods sold), jut like any other raw material incorporated into the cost of a product or service.

    Who really pays it?

    The consumer because it is baked into the cake.

    Lowering taxes has an enormous benefit on where companies decide to locate their HQ, their sales organizations, their production — this means where they decide to domicile JOBS.

    More JOBS means more income to be taxed by the Treasury which means a broader tax base and the ability to lower individual taxes.

    The money overseas — which is primarily there because of comparatively lower taxes — will flood back into the US.

    This is “economic nationalism” and it is a good thing. A damn good thing and smart people should make it happen. The question is really — how smart are you and how smart are we and how smart are our leaders?

    Get smart.

    JLM
    http://www.themusingsofthebigredcar.com