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Posts Tagged ‘Corporate income tax’

The centerpiece of President Trump’s tax plan is a 15 percent corporate tax rate.

Republicans in Congress aren’t quite as aggressive. The House GOP plan envisions a 20 percent corporate tax rate, while Senate Republicans have yet to coalesce around a specific plan.

Notwithstanding the absence of a unified approach, you would think that the stage is set for a big reduction in America’s anti-competitive corporate tax rate, which is the highest in the developed world (if not the entire world) and creates big disadvantages for American workers and companies.

If only.

While I am hopeful something will happen, there are lots of potential pitfalls, including the “border-adjustable tax” in the House plan. This risky revenue-raiser has created needless opposition from major segments of the business community and could sabotage the entire process. And I also worry that momentum for tax cuts and tax reform will erode if Trump doesn’t get serious about spending restraint.

What makes this especially frustrating is that so many other nations have successfully slashed their corporate tax rates and the results are uniformly positive.

My colleague Chris Edwards recently shared the findings from an illuminating study published by the London-based Centre for Policy Studies. It examines what’s happened in the United Kingdom as the corporate tax rates has dropped from 35 percent to 20 percent over the past 30 years. Here’s some of what Chris wrote about this report.

New evidence comes from Britain… It shows the tax rate falling from 35 percent to 20 percent since the late 1980s and corporate tax revenues as a percentage of gross domestic product (GDP) trending upwards. As the rate has fallen, the tax base has grown more than enough to keep money pouring into the Treasury. …the CPS study says, “In 1982-83 when the rate was 52%, corporation tax receipts yielded revenues equivalent to 2% of GDP. Corporation tax now raises over 2.3% of GDP when the headline rate is at just 20%.”

And keep in mind that GDP today is significantly greater in part because of a better corporate tax system.

Here’s the chart from the CPS study, showing the results over the past three decades.

 

The results from the most-recent round of corporate rate cuts are especially strong.

In 2010-11, the government collected £36.2 billion from a 28 percent corporate tax. The government expected its corporate tax package—including a rate cut to 20 percent—to lose £7.9 billion a year by 2015-16 on a static basis. …But that analysis was apparently too pessimistic: actual revenues in 2015-16 had risen to £43.9 billion. So in five years, the statutory tax rate fell 29 percent (28 percent to 20 percent) but revenues increased 21 percent (£36.2 billion to £43.9 billion). That is dynamic!

None of this should be a surprise.

Big reductions in the Irish corporate tax rate also led to an uptick in corporate receipts as a share of economic output. And remember that the economy has boomed, so the Irish government is collecting a bigger slice of a much bigger pie.

And Canadian corporate tax cuts generated the same effect, with no drop in revenues even though (or perhaps because) the federal tax rate on business has plummeted to 15 percent.

Would we get similar results in the United States?

According to experts, the answer is yes. Scholars at the American Enterprise Institute estimate that the revenue-maximizing corporate tax rate for the United States is about 25 percent. And Tax Foundation experts calculate that the revenue-maximizing rate even lower, down around 15 percent.

I’d be satisfied (temporarily) if we split the difference between those two estimates and cut the rate to 20 percent.

Let’s close with some dare-to-hope speculation from Joseph Sternberg of the Wall Street Journal about what might happen in Europe if Trump significantly drops the U.S. corporate tax rate.

Donald Trump says many things that alarm Europeans, but one of the bigger fright lines may have come in last week’s address to Congress: “Right now, American companies are taxed at one of the highest rates anywhere in the world. My economic team is developing historic tax reform that will reduce the tax rate on our companies so they can compete and thrive anywhere and with anyone.” What’s scary here to European ears is…the idea that tax policy is now fair game when it comes to global competitiveness. …One of the biggest political gifts Barack Obama gave European leaders was support for their notion that low tax rates are unfair and that taxpayers who benefit from them are somehow crooked. Europeans pushed that line among themselves for years, complaining about low Irish corporate rates, for instance. The taboo on tax competition is central to the political economy of Europe’s welfare states… Mr. Obama…backed global efforts against “base erosion and profit shifting,” meaning legal and efficient corporate tax planning. The goal was to obstruct competition among governments… The question now is how much longer Europe could resist widespread tax reform if Mr. Trump brings in a 20% corporate rate alongside rapid deregulation—or what the consequences will be in terms of social-spending trade-offs to a new round of tax cutting. Dare to dream that Mr. Trump manages to trigger a new debate about competitiveness in Europe.

Amen. I’m a huge fan of tax competition because it pressures politicians to do the right thing even though they would prefer bad policy. And I also like the dig at the OECD’s anti-growth “BEPS” initiative.

P.S. I want government to collect less revenue and spend less money, so the fact that a lower corporate tax rate might boost revenue is not a selling point. Instead, it simply tells us that the rate should be further reduced. Remember, it’s a bad idea to be at the revenue-maximizing point on the Laffer Curve (though that’s better than being on the downward-sloping side of the Curve, which is insanely self-destructive).

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For more than 30 years, I’ve been trying to educate my leftist friends about supply-side economics and the Laffer Curve.

Why is it so hard for them to recognize, I endlessly wonder, that when you tax something, you get less of it? And why don’t they realize that when you tax something at high rates, the effect is even larger?

And if the tax is high and the affected economic activity is sufficiently discouraged, why won’t they admit that this will have an impact on tax revenue?

Don’t they understand the basic economics of supply and demand?

But I’m not giving up, which means I’m either a fool or an optimist.

In this Skype interview with the Blaze’s Dana Loesch, I pontificate about the economy and tax policy.

I made my standard points about the benefits a lower corporate rate and “expensing,” while also warning about the dangers of the the “border adjustable tax” being pushed by some House Republicans.

But for today, I want to focus on the part of the interview where I suggested that a lower corporate tax rate might generate more revenue in the long run.

That wasn’t a throwaway line or an empty assertion. America’s 35 percent corporate tax rate (39 percent if you include the average of state corporate taxes) is destructively high compared to business tax systems in other nations.

Last decade, the experts at the American Enterprise Institute calculated that the revenue-maximizing corporate tax rate is about 25 percent.

More recently, the number crunchers at the Tax Foundation estimated the long-run revenue-maximizing rate is even lower, at about 15 percent.

You can (and should) read their studies, but all you really need to understand is that companies will have a greater incentive to both earn and report more income when the rate is reasonable.

But since the U.S. rate is very high (and we also have very punitive rules), companies are discouraged from investing and producing in America. Firms also have an incentive to seek out deductions, credits, exemptions, and other preferences when rates are high. And multinational companies understandably will seek to minimize the amount of income they report in the United States.

In other words, a big reduction in the corporate rate would be unambiguously positive for the American economy. And because there will be more investment and job creation, there also will be more taxable income. In other words, a bigger “tax base.”

Though I confess that I’m not overly fixated on whether that leads to more revenue. Remember, the goal of tax policy should be to finance the legitimate functions of government in the least-destructive manner possible, not to maximize revenue for politicians.

P.S. Economists at the Australian Treasury calculated the effect of a lower corporate rate and found both substantial revenue feedback and significant benefits for workers. The same thing would happen in the United States.

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What best symbolizes France’s statist political culture?

Those are good examples, to be sure, but I’ve actually already shared an everything-you-need-to-know story dealing with lavish perks for France’s protected bureaucrat class.

But there’s no rule that says I can’t have multiple everything-you-need-to-know anecdotes.

Here’s a story that reveals why France is in trouble. The Wall Street Journal reports that a French presidential candidate is arguing people shouldn’t get upset that he used taxpayer money to give his wife a no-show job because a big chunk of the money then went back to the government because of punitive taxes.

François Fillon…apologiz[ed] to the country for having employed his wife and children as parliamentary aides while rejecting accusations the jobs were phony. …Mr. Fillon characterized it as unfair for media reports to state his wife received nearly a million euros over a 15-year period, saying after taxes her monthly average income came to only €3,677 ($3,964). …The privileges traditionally available to France’s ruling class were exposed with rare candor.

So I guess Fillon wants people to think it’s okay to divert funds to family members if they “only” pocket about $48,000 per year after paying taxes.

This is disgusting. At least Fillon should have wasted taxpayer money more elegantly, like France’s current president, who doesn’t have much hair but still gave his stylist big bucks.

What makes Fillon’s story especially amusing is that he is the candidate trying to appeal to French voters who want to reduce the role of the state.

Considering that two of his major opponents are Marine Le Pen, a big-government populist, and Benoît Hamon, a socialist who favors a taxpayer-provided basic income for everyone, maybe Fillon actually is the only choice for French voters with libertarian impulses, but that’s a rather sad commentary on the state of French politics. So I don’t even know if I’ll endorse a candidate, like I did back in 2012.

What makes the situation particularly tragic is that the fiscal mess in France has become so bad that even parts of the government are concluding that some market-based reforms are necessary.

Corporation tax in France is too far above the European average, according to a report by the French Court of Auditors. The experts said a cut from 33.3% to 25% would allow companies to compete with their European counterparts. EurActiv France reports. The amount of tax paid by businesses in France has been steadily climbing for the last two decades. Today, they pay the highest rates in Europe. But this growth has not been good for the country, according to a report published by the Court… France has not always been a high tax jurisdiction, compared to other EU countries. In 1995 it was more or less at the European average. But it has steadily increased over the last 20 years. At the same time, other EU member states have been moving in the opposite direction. According to the report, most member states have lowered tax on business revenues, or have imminent plans to do so. The UK, for example plans to cut corporation tax to 17% by 2020. The average tax rate paid by EU companies fell from 33% in 1999 to 25% in 2015.

France’s suicidal fiscal regime is why – with my tongue planted firmly in cheek – I agreed with Paul Krugman back in 2013 that there is a plot against France. But I pointed out the conspirators against France were the nation’s politicians.

P.S. Actually, perhaps the story that tells you everything you need to know about France was the poll last decade revealing that more than half the population would flee to America if they had the opportunity.

P.P.S. If it wasn’t for France, we never would have had the opportunity to enjoy this very clever and amusing Scott Stantis cartoon.

P.P.P.S. Or watch this rather revealing Will Smith interview about French taxation.

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Yesterday was “Australia Day,” which I gather for Aussies is sort of like the 4th of July for Americans.

To belatedly celebrate for our friends Down Under, I suppose we could sing Waltzing Matilda.

But since I’m a policy wonk with a special fondness for the nation, let’s instead acknowledge Australia Day by citing some very interesting research

Economists at the Australian Treasury crunched the numbers and estimated the economic effects of a lower corporate tax rate. They had several levers in their model for how this change could be financed, including increases in other taxes.

Corporate income taxes are one of the most destructive ways for a government to generate revenue, so it’s not surprising that the study concluded that a lower rate would be desirable under just about any circumstance.

But what caught my attention was the section that looked at the economic impact of a lower corporate tax rate that is offset by a reduction in the burden of government spending. The consequences are very positive.

This subsection reports the findings from the model simulation of a company income tax rate cut from 30 to 25 per cent, leaving all other tax rates unchanged and assuming any shortfall in revenue across all jurisdictions is financed by a cut in government spending. …Under this scenario, GNI is expected to rise by 0.7 per cent in the long run (see Chart 9). …the improvement in real GNI is largely due to the gain in labour income. Underlying the gain in COE is an estimated rise in before-tax real wages of around 1.1 per cent and a rise in employment of 0.1 per cent.

For readers unfamiliar with economic jargon, GNI is gross national income and COE is compensation of employees.

And here’s the chart that was referenced. Note that workers (labour income) actually get more benefit from the lower corporate rate than investors (capital income).

So the bottom line is that a lower corporate tax rate leads to more economic output, with workers enjoying higher incomes.

And higher output and increased income also means more taxable income. And this larger “tax base” means that there is a Laffer Curve impact on tax revenues.

No, the lower corporate tax rate isn’t self financing. That only happens in rare circumstances.

But the study notes that about half of the revenue lost because of the lower corporate rate is recovered thanks to additional economic activity.

…After second-round effects, it is estimated that government spending must be cut by 51 cents for every dollar of direct net company tax cut. It is also estimated that 13 cents of every dollar cut is recovered through higher personal income tax receipts in the long run, while 14 cents is recovered thorough higher company income tax receipts. In the long run, the total revenue dividend from the company tax cut is estimated to be around 49 cents per dollar lost through the company tax cut

Here’s the relevant chart showing these results.

And the study specifically notes that the economic benefits of a lower corporate rate are largest when it is accompanied by less government spending.

A decrease in the company income tax rate financed by lower government spending implies a significantly higher overall welfare gain when compared with the previous scenarios of around 0.7 percentage points… As anticipated in the theoretical discussion, when viewed from the standpoint of the notional owners of the factors of production, the welfare gain is largely due to a significant improvement in labour income due to higher after-tax real wages.

By the way, the paper does speculate whether the benefits (of a lower corporate rate financed in part by less government spending) are overstated because they don’t capture benefits that might theoretically be generated by government spending. That’s a possibility, to be sure.

But it’s far more likely that the benefits are understated because government spending generates negative macroeconomic and microeconomic effects.

In the conclusion, the report sensibly points out that higher productivity is the way to increase higher living standards. And if that’s the goal, a lower corporate tax rate is a very good recipe.

Australia’s terms of trade, labour force participation and population growth are expected to be flat or declining in the foreseeable future which implies any improvement in Australia’s living standards must be driven by a higher level of labour productivity. This paper shows that a company income tax cut can do that, even after allowing for increases in other taxes or cutting government spending to recover lost revenue, by lowering the before tax cost of capital. This encourages investment, which in turn increases the capital stock and labour productivity.

This is spot on. A punitive corporate income tax is a very destructive way of generating revenue for government.

Which is why I hope American policy makers pay attention to this research. We already have the highest corporate tax rate in the developed world (arguably the entire world depending on how some severance taxes in poor nations are counted), and we magnify the damage with onerous rules that further undermine competitiveness.

P.S. By world standards, Australia has a lot of economic freedom. But that’s in part a sad indictment on the global paucity of market-oriented nations. There are some very good policies Down Under, but the fiscal burden of government is far too large. The current government is taking some small steps in the right direction (lower corporate rate, decentralization), but much more is needed.

P.P.S. In the interest of being a good neighbor, the Australian government should immediately put an end to its crazy effort to force Vanuatu to adopt an income tax.

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There are several features of President-Elect Trump’s tax plan that are worthy of praise, including death tax repeal, expensing, and lower marginal tax rates on households.

But the policy that probably deserves the most attention is Trump’s embrace of a 15 percent tax rate for business.

What makes this policy so attractive – and vitally important – is that the rest of the world has been in a race to reduce corporate tax burdens.

Ironically, the U.S. helped start the race by cutting the corporate tax rate as part of the 1986 Tax Reform Act. But ever since then, policy in America has stagnated while other developed nations are engaged in a virtuous contest to become more competitive.

And that race continues every day.

Most impressively, as reported by the Financial Times, Hungary will cut its corporate tax rate from 19 percent to 9 percent.

Hungary’s government is to cut its corporate tax rate to the lowest level in the EU in a sign of increasingly competitive tax practices among countries seeking to lure foreign direct investment. Prime Minister Viktor Orban said a new 9 per cent corporate tax rate would be introduced in 2017, significantly lower than Ireland’s 12.5 per cent. …The government said the new single band would apply to all businesses. “Corporation tax will be lowered to single digits next year: a rate of 9 per cent will apply equally to small and medium-sized enterprises and large corporations,” a statement said. …Gabor Bekes, senior research fellow at Hungary’s Institute of Economics…said the measure would likely provoke complaints of unfair tax competition from western capitals.

Needless to say, complaints from Paris, Rome, and Berlin would be a sign that Hungary is doing the right thing.

Croatia also is moving policy in the right direction, albeit in a less aggressive fashion.

Corporate income tax will…be cut from 20 to 18 per cent for large companies and from 20 to 12 per cent for small and mid-level companies whose income is no higher than 400,000 euros annually.

Though the Croatian government also plans to lower tax rates on households.

Before the reform, people with salaries between 300 and 1,750 euros a month were taxed at 25 per cent, while now everyone earning up to 2,325 euros a month will be taxed at a 24 per cent rate. People earning more than 2,325 euros a month will have a 36 per cent tax rate, replacing a 40 per cent tax rate for anyone earning over 1,750 euros a month.

But let’s keep the focus on business taxation.

Our friends on the left don’t like Trump’s plan for a corporate tax cut, but here are there things they should know.

  1. A lower corporate tax rate won’t necessarily reduce corporate tax revenue, particularly over time as there’s more investment and job creation.
  2. A lower corporate tax rate will dramatically – if not completely – eliminate any incentive for American companies to engage in inversions.
  3. A lower corporate tax rate will boost workers wages by increasing the nation’s capital stock and thus improving productivity.

If you want more information, here’s my primer on corporate taxation. You can also watch this video.

Or, to make matters simple, we can just copy Estonia, which has the world’s best system according to the Tax Foundation.

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Based on the title of this column, you may think I’m going to write about oppressive IRS behavior or punitive tax policy.

Those are good guesses, but today’s “brutal tax beating” is about what happens when a clueless leftist writes a sophomoric column about tax policy and then gets corrected by an expert from the Tax Foundation.

The topic is the tax treatment of executive compensation, which is somewhat of a mess because part of Bill Clinton’s 1993 tax hike was a provision to bar companies from deducting executive compensation above $1 million when compiling their tax returns (which meant, for all intents and purposes, an additional back-door 35-percent tax penalty on salaries paid to CEO types). But to minimize the damaging impact of this discriminatory penalty, particularly on start-up firms, this extra tax didn’t apply to performance-based compensation such as stock options.

In a good and simple tax system, which taxes income only one time (including business income), the entire provision would be repealed.

But when Alvin Chang, a graphics reporter from Vox, wrote a column on this topic, he made the remarkable claim that somehow taxpayers are subsidizing big banks because the aforementioned penalty does not apply to performance-based compensation.

…the government doesn’t tax performance-based pay for…any…top bank executive in America. Unlike regular salaries — where the government takes out taxes to pay for Medicare, Social Security, and all other sorts of things — US tax code lets banks deduct the big bonuses they give to their executives. … The solution most Americans want is to either heavily tax CEO pay over a certain amount, or to set a strict cap on how much CEOs can make, relative to their workers. As long as this loophole is open, though, it makes sense for banks to continue paying executives these huge sums. ..for now, taxpayers are still ponying up to help make wealthy bankers even wealthier, because the US tax code encourages it.

Since Mr. Chang is a graphics reporter, you won’t be surprised that he included several images to augment his argument.

Here’s one making the case that companies should pay a 35 percent tax on performance-based pay for CEO types. Keep in mind, as you peruse this image, that recipients of performance-based pay have to declare that income on their 1040s and pay 39.6 percent individual income tax.

And here’s Chang’s look at how much money the IRS could have collected from big banks in recent years if the anti-CEO tax penalty was extended to performance-based pay.

When I look at these images, my gut reaction is to be offended that Chang equates “taxpayers” with the federal government.

So I would change the caption of the first image so it ended, “…this pile would be diverted from shareholders to politicians.”

And the caption in the second image would read, “This is the amount it saved taxpayers.”

But Chang’s argument is also flawed for much deeper reasons. Scott Greenberg of the Tax Foundation debunks his entire column. Not just debunks. Eviscerates. Destroys.

Here are some of the highlights.

…the article contains several factual errors and misleading claims about how CEOs are taxed in America. The article begins by making an incorrect claim: that the federal government does not tax performance-based CEO pay… This is simply untrue. Under the U.S. tax code, households are generally required to pay individual income taxes on the value of the stock options and bonuses that they receive…up to 39.6% on the performance-based pay… The article continues with another false assertion…it claims that CEO performance-based pay is not subject to the same Social Security and Medicare payroll taxes as “regular salaries.” In fact, all employee compensation, including CEO pay, is subject to Medicare payroll taxes, and high-income individuals actually pay a higher Medicare payroll tax rate than most other employees. …it claims that U.S. businesses are allowed to deduct CEO pay but are not allowed to deduct “regular salaries.” This is patently incorrect. Under the U.S. tax code, businesses are allowed to deduct virtually all compensation to employees. In fact, the only major exception to this rule is that businesses are only allowed to deduct $1 million in non-performance-based salaries to CEOs. This means that the U.S. tax code gives the same, if not worse, treatment to CEO compensation as “regular salaries.”

Scott also addresses the silly assertion that deductions for CEO compensation are some sort of subsidy.

You probably wouldn’t claim that taxpayers are subsidizing the restaurant worker’s salary, because the deduction for employee compensation is a regular, structural feature of the tax code. In general, businesses in the U.S. are taxed on their revenues minus their expenses, and the salary paid to the worker is a business expense like any other. The same argument applies for CEO compensation. When a business pays a CEO $155 million, it has increased its expenses and decreased its profits. The normal logic of U.S. tax law dictates that the business be allowed to deduct the CEO’s compensation from its taxable income. Then, the CEO is required to pay individual income taxes on the compensation.

The bottom line, as Scott points out, is that Bill Clinton’s provision means that CEO pay is penalized rather than subsidized.

…wages and salaries of CEOs are penalized relative to the wages and salaries of regular employees, while performance-based compensation is taxed in the same manner as regular wages and salaries. In sum, it is simply wrong to say that the federal tax code subsidizes CEO pay.

Game, set, and match. Mr. Chang should stick to graphics rather than tax policy.

And policy makers should resist tax policies based on envy and resentment since the net result is a tax code that is needless complex and pointlessly destructive.

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Working the world of public policy, I’m used to surreal moments.

Such as the assertion that there are trillions of dollars of spending cuts in plans that actually increase spending. How do you have a debate with people who don’t understand math?

Or the oft-repeated myth that the Reagan tax cuts for the rich starved the government of revenue. How can you have a rational discussion with people who don’t believe IRS data?

And let’s not overlook my personal favorite, which is blaming so-called tax havens for the financial crisis, even though places such as the Cayman Islands had nothing to do with the Fed’s easy-money policy or with Fannie Mae and Freddie Mac subsidies.

These are all example of why my hair is turning gray.

But I’ll soon have white hair based on having to deal with the new claim from European bureaucrats that countries are guilty of providing subsidies if they have low taxes for companies.

I’m not joking. This is basically what’s behind the big tax fight between Apple, Ireland, and the European Commission.

Here’s what I said about this issue yesterday.

There are three things about this interview are worth highlighting.

  • First, the European Commission is motivated by a desire for more tax revenue. Disappointing, but hardly surprising.
  • Second, Ireland has benefited immensely from low-tax policies and that’s something that should be emulated rather than punished.
  • Third, I hope Ireland will respond with a big corporate tax cut, just as they did when their low-tax policies were first attacked many years ago.

I also chatted with the folks from the BBC.

I’ll add a few comments on this interview as well.

Here’s an interview from the morning, which was conducted by phone since I didn’t want to interrupt my much-needed beauty sleep by getting to the studio at the crack of dawn.

Once again, here are a few follow-up observations.

  • First, I realize I’m being repetitive, but it’s truly bizarre that the European Commission thinks that low taxes are a subsidy. This is the left-wing ideology that the government has first claim on all income.
  • Second, it’s a wonky point, but Europe’s high-tax nations can use transfer pricing rules if they think that Apple (or other companies) are trying to artificially shift income to low-tax countries like Ireland.
  • Third, the U.S. obviously needs to reform its wretched corporate tax system, but that won’t solve this problem since it’s about an effort to impose more tax on Apple’s foreign-source income.

The Wall Street Journal opined wisely on this issue, starting with the European Commission’s galling decision to use anti-trust laws to justify the bizarre assertion that low taxes are akin to a business subsidy.

Even by the usual Brussels standards of economic malpractice, Tuesday’s €13 billion ($14.5 billion) tax assault on Apple is something to behold. …Apple paid all the taxes it owed under existing tax laws around the world, which is why it hasn’t been subject to enforcement proceedings by revenue authorities. …Brussels now wants to use antitrust law to tell Ireland and other low-tax countries how to apply their own tax laws. …Brussels is deploying its antitrust gnomes to claim that taxes that are “too low” are an illegal subsidy under EU state-aid rules.

This is amazing. A subsidy is when government officials use coercion to force taxpayers (or consumers) to pay more in order to line the pockets of a company or industry. The Export-Import Bank would be an example of this odious practice, as would ethanol handouts.

Choosing to tax at a lower rate is not in this category. It’s a reduction in government coercion.

That doesn’t necessarily mean we’re necessarily talking about good policy since there are plenty of preferential tax laws that should be wiped out as part of a shift to a simple and fair flat tax.

I’m simply pointing out that lower taxes are not “state aid.”

The WSJ also points out that it’s not uncommon for major companies to seek clarification rulings from tax authorities.

Brussels points to correspondence between Irish tax officials and Apple executives to claim that Apple enjoyed favors not available to other companies, which would be tantamount to a subsidy. But all Apple received from Dublin, in 1991 and 2007, were letters confirming how the tax authorities would treat various transactions under the Irish laws that applied to everyone. If anyone in Brussels knew more about tax law, they’d realize such “comfort letters” are common practice around the world.

Indeed, the IRS routinely approves “advance pricing agreements” with major American taxpayers.

This doesn’t mean, by the way, that governments (the U.S., Ireland, or others) treat all transactions appropriately. But it does mean that Ireland isn’t doing something strange or radical.

The editorial also makes the much-needed point that the Obama White House and Treasury Department are hardly in a position to grouse, particularly because of the demagoguery and rule-twisting that have been used to discourage corporate inversions.

As for the U.S., the Treasury Department pushed back against these tax cases, which it rightly views as a protectionist threat to the rule of law. But it’s hard to believe that Brussels would have pulled this stunt if Treasury enjoyed the global respect it once did. President Obama and Treasury Secretary Jack Lew have also contributed to the antibusiness political mood by assailing American companies for moving to low-tax countries.

Amen.

It’s also worth noting that the Obama Administration has been supportive of the OECD’s BEPS initiative, which also is designed to increase corporate tax burdens and clearly will disadvantage US companies.

A story from the Associated Press reveals the European Commission’s real motive.

The European Commission says…it should help protect countries from unfair tax competition. When one country’s tax policy hurts a neighbor’s revenues, that country should be able to protect its tax base.

Wow, think about what this implies.

We all recognize, as consumers, the benefits of having lots of restaurants competing for our business. Or several cell phone companies. Or lots of firms that make washing machines. Competition helps us by leading to lower prices, higher quality, and better service. And it also boosts the overall economy because of the pressure to utilize resources more efficiently and productively.

So why, then, should the European Commission be working to protect governments from competition? Why is it bad for a country with low tax rates to attract jobs and investment from nations with high tax rates?

The answer, needless to say, is that tax competition is a good thing. Ever since the Reagan and Thatcher tax cuts got the process started, there have been major global reductions in tax rates, both for households and businesses, as governments have competed with each other (sadly, the US has fallen way behind in the contest for good business taxation).

Politicians understandably don’t like this liberalizing process, but the tax competition-induced drop in tax rates is one of the reason why the stagflation of the 1960s and 1970s was replaced by comparatively strong growth in the 1980s and 1990s.

Let’s close by looking at one final story.

Bloomberg has a report on the Apple-Ireland-EC controversy. Here are some relevant passages.

Irish Finance Minister Michael Noonan on Tuesday vowed to fight a European Commission ruling… The country’s corporate tax regime is a cornerstone of its economic policy, attracting Google Inc. and Facebook Inc. to Dublin. …While the Apple ruling doesn’t directly threaten the 12.5 percent rate, the government has promised to stand by executives it says are helping the economy. “To do anything else, it would be like eating the seed potatoes,” Noonan told broadcaster RTE on Tuesday, adding a failure to fight the case would hurt future generations.

Kudos to Noonan for understanding that a short-term grab for more revenue will be bad news if the tradeoff is a more onerous tax system that reduces future growth.

I wish Hillary Clinton was capable of learning the same lesson.

Also, it’s worth noting that Apple is just the tip of the iceberg. If the EC succeeds, many other American companies will be under the gun.

The iPhone-maker is one of more than 700 U.S. companies that have units there, employing a combined 140,000 people, according to the American Chamber of Commerce in Ireland.

And when politicians – either here or overseas – raise taxes on companies, never forget that they’re actually raising taxes on worker, consumers, and shareholders.

P.S. Just in case you think the Obama Administration is sincere about defending Apple and other American companies, don’t forget that these are the folks who included a global corporate minimum tax scheme in the President’s most recent budget.

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