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A Better Way to Tax U.S. Businesses
Posted: Mon Jul 16, 2012 8:06 am
by UNI88
A Better Way to Tax U.S. Businesses
http://hbr.org/2012/07/a-better-way-to- ... esses/ar/1
Interesting article on reforming corporate taxes.
Of all the policy changes that could improve the competitive position of the United States and the living standards of Americans, revamping the corporate tax code is perhaps the most obvious and least painful. High corporate taxes divert capital away from the U.S. corporate sector and toward noncorporate uses and other countries. They therefore limit investments that would raise the productivity of American workers and would increase real wages. This is the cruel logic of a corporate tax in a global economy—that its burden falls most heavily on workers.
What principles should guide a reform of the corporate tax that would advance American interests? First, the structure of the tax must reflect developments in the world economy—notably, declining tax rates in other nations, the mobility of innovative and headquarters activities, and the rising importance of non-U.S. markets. Second, corporate tax reform will probably need to be instituted separately from fundamental tax reform and must be roughly revenue-neutral, given fiscal and political realities. Third, any reform must relegitimize corporations as responsible citizens and the corporate tax as a meaningful policy instrument.
The worst of all worlds—high rates and a narrow base. In 1986, the year of the last significant tax reform, the U.S. corporate tax rate was lower than that of most developed countries. Today the top U.S. corporate rate of 35% is one of the world’s highest. During the intervening years, America’s global economic importance decreased—a sometimes unsettling artifact of welcome growth in the developing world. As the importance of doing business in the United States has shrunk, the relative cost has risen rapidly.
Because capital is mobile, high tax rates divert investment away from the U.S. corporate sector and toward housing, noncorporate business sectors, and foreign countries. American workers need that capital to become more productive. When it’s invested elsewhere, real wages decline, and if product prices are set globally, there is no place for the corporate tax to land but straight on the back of the least-mobile factor in this setting: the American worker. The flow of capital out of the United States only accelerates as opportunities in the rest of the world increase. This is the key to understanding why, despite political rhetoric to the contrary, reforming the corporate tax is central to improving the position of the American worker.
So what say those that believe corporate tax rates need to be increased?
Re: A Better Way to Tax U.S. Businesses
Posted: Mon Jul 16, 2012 10:09 am
by GannonFan
Nothing really novel in that piece - basically make the tax system simpler (less complex means fewer or no loopholes and no reason to spend so much effort finding them), lower the rates to match what the rest of the world does (less incentive to go elsewhere), simplify reporting to make things clearer, and then that piece at the end about touting social responsibility. It's a great idea and I don't think anyone's going to argue (well, I take that back, some people are going to argue just for the sake of arguing) that a simpler system of corporate taxation would work. Of course, the same could be said for individual taxes as well. Problem is, politicians need to get elected and one of the ways to do that now is to craft the tax code to pick out winners (your supporters) and losers (those who don't support you) and hope you do it better than the person running against you. I don't see that culture changing anytime soon, nor do I see the leadership necessary to initiate that change emerging anytime soon either. Obama had that potential but his misteps and blunders have erased that, assuming he was ever really genuine about it to begin with, and Romney is never going to be mistaken for a guy who would advocate major changes like this.
Re: A Better Way to Tax U.S. Businesses
Posted: Mon Jul 16, 2012 11:57 am
by CitadelGrad
The complexity of the tax code allows the government to use it as a weapon. They have absolutely no incentive to reform it.
Re: A Better Way to Tax U.S. Businesses
Posted: Tue Jul 17, 2012 10:06 am
by kalm
UNI88 wrote:A Better Way to Tax U.S. Businesses
http://hbr.org/2012/07/a-better-way-to- ... esses/ar/1
Interesting article on reforming corporate taxes.
Of all the policy changes that could improve the competitive position of the United States and the living standards of Americans, revamping the corporate tax code is perhaps the most obvious and least painful. High corporate taxes divert capital away from the U.S. corporate sector and toward noncorporate uses and other countries. They therefore limit investments that would raise the productivity of American workers and would increase real wages. This is the cruel logic of a corporate tax in a global economy—that its burden falls most heavily on workers.
What principles should guide a reform of the corporate tax that would advance American interests? First, the structure of the tax must reflect developments in the world economy—notably, declining tax rates in other nations, the mobility of innovative and headquarters activities, and the rising importance of non-U.S. markets. Second, corporate tax reform will probably need to be instituted separately from fundamental tax reform and must be roughly revenue-neutral, given fiscal and political realities. Third, any reform must relegitimize corporations as responsible citizens and the corporate tax as a meaningful policy instrument.
The worst of all worlds—high rates and a narrow base. In 1986, the year of the last significant tax reform, the U.S. corporate tax rate was lower than that of most developed countries. Today the top U.S. corporate rate of 35% is one of the world’s highest. During the intervening years, America’s global economic importance decreased—a sometimes unsettling artifact of welcome growth in the developing world. As the importance of doing business in the United States has shrunk, the relative cost has risen rapidly.
Because capital is mobile, high tax rates divert investment away from the U.S. corporate sector and toward housing, noncorporate business sectors, and foreign countries. American workers need that capital to become more productive. When it’s invested elsewhere, real wages decline, and if product prices are set globally, there is no place for the corporate tax to land but straight on the back of the least-mobile factor in this setting: the American worker. The flow of capital out of the United States only accelerates as opportunities in the rest of the world increase. This is the key to understanding why, despite political rhetoric to the contrary, reforming the corporate tax is central to improving the position of the American worker.
So what say those that believe corporate tax rates need to be increased?
The system is definitely too complicated, but not so that government can use it as a weapon as c-grad suggested. And while our rate is among the highest, our effective rate isn't even close.
So simplify it, make it competitive? Hell yes. Make it revenue neutral? That would be nice too.
Re: A Better Way to Tax U.S. Businesses
Posted: Tue Jul 17, 2012 12:50 pm
by GannonFan
Well it can certainly be used as a weapon - just look at the coal industry for an example. And if weapon isn't the right term, it is used to pick winners and losers and both parties have used it that way. But yes, it is far too complicated but it doesn't appear we are any closer to reversing that.
Re: A Better Way to Tax U.S. Businesses
Posted: Tue Jul 17, 2012 2:18 pm
by kalm
GannonFan wrote:
Well it can certainly be used as a weapon - just look at the coal industry for an example. And if weapon isn't the right term, it is used to pick winners and losers and both parties have used it that way. But yes, it is far too complicated but it doesn't appear we are any closer to reversing that.
Agreed. I only brought that up to point out that it's complicated not only because government decided to be a dick and wield it as a hammer (although admittedly that can happen). Winners and losers are also chosen by competing industries and who's campaign they fund. They hold the hammer as well.
Re: A Better Way to Tax U.S. Businesses
Posted: Tue Jul 17, 2012 4:42 pm
by LeadBolt
Interesting tidbit (at least to me), I am working on a trans-border deal in Canada.
The folks I am dealing with have corporation both in the US and in Canada.
They want the transaction structured so that the bulk of the expenses go to the US company and the bulk of the revenues go to the Canadian company, because they say their effective tax rate in Canada is lower than in the US and depreciation allowances are greater in the US.
Re: A Better Way to Tax U.S. Businesses
Posted: Tue Jul 17, 2012 6:39 pm
by danefan
LeadBolt wrote:Interesting tidbit (at least to me), I am working on a trans-border deal in Canada.
The folks I am dealing with have corporation both in the US and in Canada.
They want the transaction structured so that the bulk of the expenses go to the US company and the bulk of the revenues go to the Canadian company, because they say their effective tax rate in Canada is lower than in the US and depreciation allowances are greater in the US.
I hope it's a non-US parent company.....getting revenue back to the US from Canada automatically attracts a 5% withholding tax.
Re: A Better Way to Tax U.S. Businesses
Posted: Tue Jul 17, 2012 9:03 pm
by LeadBolt
danefan wrote:LeadBolt wrote:Interesting tidbit (at least to me), I am working on a trans-border deal in Canada.
The folks I am dealing with have corporation both in the US and in Canada.
They want the transaction structured so that the bulk of the expenses go to the US company and the bulk of the revenues go to the Canadian company, because they say their effective tax rate in Canada is lower than in the US and depreciation allowances are greater in the US.
I hope it's a non-US parent company.....getting revenue back to the US from Canada automatically attracts a 5% withholding tax.
It is small company set up with a Canadian parent run by a dual citizen of both countries. If our ax laws were less Bizantine and morefavorable, the tax would be paid in the US, not Canada.