Tax Policy and Corporate Investment

Wall Street Journal Today:
J.P. Morgan JPM +1.58% research report estimates that there is $1.7 trillion of undistributed foreign earnings held by more than 1,000 U.S. companies overseas. But only 600 disclose how much of their foreign cash is held offshore. Some like Johnson & Johnson JNJ +0.31% and Illinois Tool Works ITW +1.26% have all their cash in foreign subsidiaries.

According to some as much as 60% of corporate cash is overseas, why? Corporations in America make lots of money overseas the majority of which has already been taxed in the nations it was earned. If the corporation wants to bring that money back to the United States they are required to pay again, typically 35%.

From Brookings:

Even though a corporation is eligible for a tax credit equal to foreign taxes paid, the decision to repatriate earnings typically requires that corporation to incur a significant tax cost. As a result, corporations usually find it more attractive to defer U.S. taxation by reinvesting their foreign earnings abroad.

Some Republicans have called for a repatriation tax holiday or a territorial tax system whereby profits are only taxed once in the country they are earned. This seems fair but Democrats have argued that certain profits wouldn’t be taxed at all. The tax code is immense and corporations have whole departments whose job it is to minimize taxes paid. Politicians pass more and more laws and corporations find more ways to get around paying. Massive companies like General Electric have mastered the art of avoiding taxes despite billions in profits.

What is the solution? I propose a corporate income tax rate of zero. Corporations are entities made up of people and those people are all paid in some way eventually whether it be salary, stock or benefits. All of those forms of income are taxed eventually, meaning that a corporate tax is redundant and a form of double taxation. Corporations would still pay plenty of taxes in other forms such as payroll and sales and energy taxes.

Taxation on profits is inefficient as well, The Atlantic:

The corporate income tax encourages firms to waste resources on tax avoidance  In general, taxes are most efficient when they fall on those who have the most difficulty avoiding them.  Big corporations can and do spend an enormous amount of money and human effort transforming their income into more tax-preferred forms–deferring it, moving it, swapping it with entities that have different tax rules, and so forth.  We spend an enormous amount of energy trying to make rules to stop them.  It would be a lot easier to get rid of the thing entirely and focus on getting the money from people, who can’t afford quite such large squads of tax attorneys.  This would also correct an obvious flaw in the corporate tax code: it’s easier for big companies to afford pricey tax lawyers–and pricey lobbyists to get them special tax breaks.

Surely some will argue that with any change to the tax code there will be some who take advantage of it, and they are correct. The question becomes what can we do to make taxes as fair and efficient as possible and encourage growth that ultimately means more revenue. The answer is simpler laws that are enforceable, it shouldn’t require whole teams of lawyers and accountants to do a businesses taxes. Lets make the code simpler and then focus enforcement efforts on the remaining cheats. What we have now are special interests deciding our tax laws. Thousands of lobbyist exert pressure to get favorable laws and regulations that reduce their clients liabilities. Lets remove the complexity and make the code simple and fair and eliminate the need for special interest lobbying.

Imagine the corporations worldwide that would pour billions perhaps trillions of dollars into the US economy if we had a simpler and lower tax policy. We already try to create incentives for all kinds of special interests like the film industry and alternative energy; so clearly we understand that tax policy influences growth and investment. Government shouldn’t be in the business of deciding who gets special treatment with our money, picking winners and losers.

Some of my progressive friends will call this idea a race to the bottom and say that other countries would follow suit. I agree, I hope they do follow suit and eliminate corporate taxes. I believe in growth and if we reduce tax burdens and make taxes work fairly we will all benefit and governments will have the revenue they need. What governments should spend their tax revenue on is a separate argument for another column. Tax policy is complex and I haven’t answered all the problems here- but I know that we can make our system more equitable with simplicity.

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2 comments

  1. vbahn

    Eliminating corporate taxes has a fundamental problem that you, as a free market libertarian, should be well aware of: it would be a form of subsidization and externalization of costs and thus market distortion. Corporations profit from existing infrastructure, protection by the military, polluting common goods such as air and water, public education of their workers, sometimes even social payments to workers whose earning are below poverty lines. If all these costs are externalized from the corporations, a massive market distortion follows and the corporations most profiting from these distortions will achieve unfair advantages and further distort the market. Therefore, in final consequence, your suggestion to subsidize corporations in this hidden way, will lead away from a free market and will lead to undesirable and suboptimal outcomes.

  2. joshkline

    I have heard this argument before. My answer is that costs shouldn’t be externalized and need not be- corporate taxation or otherwise. Corporate tax is a form of double taxation that is the main reason it is bad policy in addition to the negative consequences described.

    I am not suggesting corporations be free of liability from environmental damage. I am not suggesting that there not be any government oversight regarding impacts to the environment and enforcement of mitigation costs. I would prefer this be local and sensible of course. As for existing infrastructure I am not sure how far you wish to take that. As I say in the article the corporation pays out to people and is in fact really just a collection of people and all those people pay taxes that pay for roads, bridges, security, public services etc. In this way corporate tax amounts to a double taxation. Corporations are charged extra with certain regulations, if they have a large event they need to pay for the extra policing needed or to have fire and ambulatory services. This is fine also. We also need to simplify the tax code and take away special breaks for certain industries that are unfair. There are also some unfair practices like carried interest in the private equity field that from my current understanding seem inequitable.

    As for the social payments I would eliminate them as much as possible. You are right- social payments like medicaid are a market distortion. My answer is that the federal government especially and government in general shouldn’t be in the business of reallocating money to pay for social welfare in all its’ forms. This becomes a separate argument regarding welfare and public vs. private charity. I am unsure of what would happen to wages at Walmart (common example) if those workers stopped receiving all government aid. I also suspect the amount of workers receiving aid is overstated. This is a complex relationship between many market forces. My guess is that wages would be about the same until the economy starts to grow again and then some healthy increases in choices for workers would cause wages to rise and prices with it. People need to be responsible for themselves and private charity should help those unable or willing. There is also a place for private insurance to protect people who become disabled or simple experience a temporary loss of income. The private marketplace can take over these needs and do a better job. Some people would suffer and not take precautions but I firmly believe we would have less poor in the long term as people would have greater incentive to do for themselves. Private benevolence would take care of most of the remainder.

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