Tag: corporate income tax

Emergency Aid to Seniors? No Way

Social Security benefits are indexed for inflation, but because inflation has been roughly zero for the past year, the adjustment formula implies no increase in benefits this year. Nevertheless,

President Obama on Wednesday attempted to preempt the announcement that Social Security recipients will not get an increase in their benefit checks for the first time in three decades, encouraging Congress to provide a one-time payment of $250 to help seniors and disabled Americans weather the recession.

Obama endorsed the idea, which is expected to cost at least $13 billion, as the administration gropes for ways to sustain an apparent economic rebound without the kind of massive spending package that critics could label a second stimulus act.

This is outrageous on four levels:

1. If the president thinks the economy needs more stimulus, he should say that explicitly and have an honest debate.

2. This is the wrong kind of stimulus. Any further stimulus should consist of reductions in marginal tax rates, such as a cut in the corporate income tax (or better yet, repeal).

3. All Social Security recipients already have a moderate guaranteed income, and many have significant income beyond their Social Security benefits. This kind of transfer has no plausible justification as redistribution for the needy.

4. Sending checks to seniors is a blatant attempt to buy their support for Obamacare, which promises to cut Medicare spending substantially.

C/P Libertarianism, from A to Z

Injustice of State Subsidies

My colleague Chris Edwards made a good point yesterday in his post on the injustice of federal subsidies.  The wrangling between the states to haul in the federal largesse is wasteful, and getting worse.  But the underlying issue in the article Chris cites — a state using taxpayer money to lure a company away from another state — is another wasteful activity that is all too common.

Instead of competing with other states to attract industry by lowering taxes and reducing regulations, it seems most state governors prefer a politically opportunistic method I call “press release economics.”  Here’s how it works:

A state “economic development” agency offers an out-of-state company (or even an out-of-country company) tax breaks and/or direct subsidies to locate some or all of its business operations in that state.  Most likely, the business would have located there anyhow due to myriad factors including demographics, transportation logistics, and workforce capabilities.  Sometimes several states will engage in a “bidding war” to get a business to set up shop within their borders.  The governor of the “winning” state will then issue a press release citing the new jobs and capital his administration has just brought to the state.  The locating company usually tells the press that the winning state’s package helped seal the deal.  The company and the governor’s press staff then typically arrange a photo-op at an orchestrated ground-breaking ceremony for the new facilities.

If a state is already bleeding jobs, as is often the case in the current economy, such press releases and photo-ops can be a political coup.  Moreover, the governor will have given up, or foregone, relatively little in tax revenue in comparison to, say, cutting the state corporate income tax.  This also leaves the governor with more money to spend on various vote-buying programs. I’m picking on governors, but the legislature generally prefers the press-release economics route for similar reasons.  And if you’re a governor, why risk the headache of engaging the legislature in a fight over reducing corporate taxes, unemployment taxes, or any other tax — including personal income taxes and sales taxes — that effect industry when you can take the easy win?

Am I too cynical?  Actually, I had first-hand experience with this issue when I worked in state government.  My suggestion that the governor eliminate or reduce the state’s high corporate income tax rate, and “pay for it” — at least in part — by getting rid of the state’s corporate welfare apparatus, was routinely ignored for the reasons I cited above.  That one would be hard-pressed to find support among the economics profession for the state corporate welfare give-away game means little to the majority of policymakers and their minions who naturally favor short-term political gain over long-term economic gain.  That other companies already located within the state are stuck paying the regular tax rate, and are thus put at a competitive disadvantage, is a secondary or non-concern as well.

Another issue that I won’t delve into here is the fact that these giveaways often blow up in a state’s face when the locating company ends up not producing the jobs it promised and/or it relocates to another state or country after pocketing the free taxpayer money.  Anyhow, journalists should be on the lookout for more press-release economics schemes coming from the states as revenues remain tight and politicians become desperate to demonstrate they’re “doing something.”  Journalists should examine a state’s tax structure when a taxpayer giveaway is announced to see if perhaps the governor is masking economic-unfriendly fiscal policies.

Note: South Carolina Gov. Mark Sanford proposed late last year to do exactly what I recommended: eliminate the state’s corporate income tax, offset in part by the elimination of corporate tax incentives.  There is hope.

Euro VAT for America?

Desperate for fresh revenues to feed the giant spending appetite of President Obama, Democratic policymakers are talking up ‘tax reform’ as a way to reduce the deficit. Some are considering a European-style value-added tax (VAT), which would have a similar effect as a national sales tax, and be a large new burden on American families.

A VAT would raise hundreds of billions of dollars a year for the government, even at a 10-percent rate. The math is simple: total U.S. consumption in 2008 was $10 trillion. VATs usually tax about half of a nation’s consumption or less, say $5 trillion. That means that a 10% VAT would raise about $500 billion a year in the United States, or about $4,300 from every household. Obviously such a huge tax hit would fundamentally change the American economy and society, and for the worse.

Some fiscal experts think that a VAT would solve the government’s budget problems and reduce the deficit, as the Washington Post noted yesterday. That certainly has not happened in Europe where the average VAT rate is a huge 20 percent, and most nations face large budget deficits just as we do. The hard truth for policymakers to swallow is that the only real cure for our federal fiscal crisis is to cut spending.

Liberals like VATs because of the revenue-raising potential, but some conservatives are drawn to the idea of using VAT revenues to reduce the corporate tax rate. The Post story reflected this in noting “A 21 percent VAT has permitted Ireland to attract investment by lowering the corporate tax rate.” That implies that the Irish government lost money when it cut its corporate rate, but actually the reverse happened in the most dramatic way.

Ireland installed a 10% corporate rate for certain industries in the 1980s, but also steadily cut its regular corporate rate during the 1990s. It switched over to a 12.5% rate for all corporations in 2004. OECD data show that as the Irish corporate tax rate fell, corporate tax revenues went through the roof – from 1.6% of GDP in 1990, to 3.7% in 2000, to 3.8% in 2006.

In sum, a VAT would not solve our deficit problems because Congress would simply boost its spending even higher, as happened in Europe as VAT rates increased over time. Also, a VAT is not needed to cut the corporate income tax rate because a corporate rate cut would be self-financing over the long-term as tax avoidance fell and economic growth increased.

America Alone on Punitive Corporate Taxes

In Tax Notes International today, two Ernst and Young experts describe how corporate tax reforms in Japan have made America an even bigger outlier in its punitive treatment of multinational corporations:

Japan’s recent adoption of a territorial tax system as part of a broader tax reform reduces the tax burden on the foreign-source income of Japanese multinational corporations.

Before the Japanese reform, the two largest economies had both high corporate income tax rates and worldwide tax systems. Now the United States not only has the second-highest corporate income tax rate of the OECD countries, it is also one of the few that still have a general worldwide tax system.

The Japanese corporate tax reform is part of a global trend toward reduced taxation of corporate income, which often takes the form of a significantly reduced corporate tax rate but also is reflected through reduced taxation of foreign-source income.

The details of the president’s budget proposal to reform deferral are expected in the coming weeks. As we await the specifics, it is clear that the direction of the proposal runs counter to this strong current of global corporate tax reform with lower overall corporate tax rates and reductions in domestic taxation of foreign-source income.

In simple terms, Japan’s reforms may give firms such as Toyota or Hitachi an advantage over firms such as Ford or General Electric in international markets.

Alas, U.S. policymakers don’t seem to understand that in a globalized world of free-flowing capital we need to change our uncompetitive tax policies. At Cato, we will keep trying to educate them, but it is sad that our economy loses jobs and investment because our elected leaders are such slow learners compared to leaders in Japan, Jordan, Canada, and elsewhere.

Obama vs. Ontario

The left-of-center government in Ontario, Canada’s largest province, is enacting dramatic corporate income tax (CIT) cuts. It announced last week that it is phasing in a reduction of the provincial CIT to 10 percent, which is paid on top of the federal rate that itself is falling to 15 percent. The combined rate of 25 percent will be far lower than the average U.S. federal/state rate of 40 percent.

The province is also eliminating sales taxes on business purchases, which will substantially reduce effective business tax rates.

As the Canadian Press reports, the cuts will make Ontario’s business tax rates much “lower than the average U.S. Great Lake state, considered Ontario’s main competitors for jobs and investment.”

Big Three auto companies, for example, may decide to close their U.S. plants over their numerous Ontario plants if they conclude that there will be a long-term Canadian tax advantage.

For its part, the Obama administration’s budget proposed a range of higher taxes on businesses, going in the exact opposite direction of virtually all other advanced economies.