How Can The US Win the Corporate Tax Battle?

This post is by Jeff Carter from Points and Figures

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An attorney friend of mine sent me this video.  It’s recent testimony from a tax attorney who works with corporations.  In many ways, it’s heartbreaking. It’s slightly edited for brevity, but here is a link to the entire testimony.

I have another friend who is one of the leading tax attorneys in the world. He has done many corporate inversions and M&A transactions purely for tax reasons. We have spoken at length about the US tax code.  When President Obama was re-elected I said it would keep him busy for the next four years, but it was a horrible day for American business.  Corporate tax policy wasn’t going to change under Obama.

First, understand that the first duty a corporation has is to it’s shareholders, and it’s customers. There isn’t such a thing as patriotism in a corporate charter. It’s mission is to deliver goods and services to people at lowest possible price while maintaining the highest possible profit margin to make the most amount of money it can. Period, the end.

Second, corporations don’t actually pay taxes.  They aggregate them.  They just build taxes into the prices they charge end users.  The same goes for the cost of labor, the costs of raw materials, and the cost of operations.  They rarely eat it, unless they have competition.

Boards of Directors of big companies don’t worry about waving the flag when they look at the bottom line.  Made In America is a marketing slogan, that’s it.  They would love to manufacture as much as they can in America because logistics are easier.  But, America’s tax and regulatory structure is a game changer.

Understand, dropping the corporate tax rate isn’t a race to the bottom.  It’s a race to growth.  For the entire lifetime of the Obama Presidency, GDP has never been above 2%.  It’s not the new normal.  It’s the public policies.  The US has really really poor public policy when it comes to corporate taxes, regulation, and central bank policy.

The revenue collected for 2014 from federal personal income taxes will be roughly $1.4 trillion. The federal corporate income tax will generate an estimated $.32 trillion for the same period.  It’s peanuts.  Corporations spend millions trying to find loopholes and ways around the taxes.

Listen to the testimony.  One interesting point is that even though corporations have lower rates in other countries, they still do all they can to avoid paying the lower rate.  Corporations are just like people.  People do all they can to avoid paying higher rates of taxes too.

The corporate tax rate in America should be 0%.  It will help workers, according to the very liberal New York Times.  The liberal Atlantic has called for a 0% rate.  There are plenty of reasons to end the corporate tax rate.  Milton Friedman called for 0% rates a long long time ago.  It’s time to go to 0%.

Here is a better reason to go to 0%.  Trillions of dollars would come back into the US.  The math regarding taking jobs out of the country, and taking production out of the country will change 180 degrees.

US tax policy is also very penal for corporate employees.  It’s super expensive for a US citizen to work out of the US.  Their tax returns are complex, and burdensome.  So much so that many are choosing to renounce their US citizenship.  Most do it because of tax consequences.  The US has increased the fees to renounce citizenship.

More people working will cause the US to collect more in personal income taxes.  That means more in FICA taxes too.  Chronic unemployment is a massive problem in the US now.  We have a low unemployment rate, but the lowest labor participation rate since the Great Depression.

A 0% corporate tax will also allow companies to pay higher dividends, returning money to shareholders that will get redeployed into the economy.  It will lower the hurdle rates for corporate investment in new production.

Losing people is a drain on human capital.  Not only are countries competing for corporate business, but they are in a race to attract the best human capital as well.  The US has the best legal structure for companies.  They want to be here. But, they need an economic incentive to be here.

States should also scrap their corporate taxes and make them 0%.  States that have lower taxes are showing more growth, and also have the most in migration of people.  That’s because those states are where the opportunity is.

I am spending a little time in Austin, Texas away from the cold in Chicago.  I see as many Chicago Blackhawk jerseys down here as I see at home.  We drove 30 miles outside of Austin, and they are building subdivision after subdivision.  Real estate prices here per square foot are not cheap.  That’s because of demand, and opportunity.  When we meet people they are from California, New York and other high tax/high regulatory states.

This will be a very tough pill for liberals to swallow.  Many will say it’s not “fair”.  But, it’s not about fairness. It’s about competing and simple math.  Maybe if they frame the issue this way it might be easier to stomach.  They can go to 0% taxes and let corporations off the hook-but the tradeoff is more opportunity and employment for US workers who will pay taxes.  Or, they can keep corporate taxes the same, or even raise them, and dole out trillions of dollars in social programs because American citizens can’t find opportunity.  I don’t understand why they want to penalize people.  Meanwhile, more and more American companies will continue to repatriate outside the US.

A 0% corporate tax rate should be a massive campaign issue.  Occasionally, you hear candidates speak about it, but the ones I hear the most are talking about raising taxes and costs, not lowering them.