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Posts Tagged ‘Corporate income tax’

Let’s look today at the wonky issue of “book income” because it’s an opportunity to point out that there are three types of leftists.

  1. Honest leftists who understand economics and recognize tradeoffs (I think of them as “Okunites“).
  2. Dishonest leftists who understand economics but pretend that tradeoffs don’t exist (the “demagogues“).
  3. Leftists who have no idea what they’re saying or thinking (I think of them as, well, Joe Biden).

I’m being snarky about the President because of this recent tweet, which contains a couple of big, glaring mistakes.

What are the mistakes (I’m not calling them lies because I don’t think Biden has the slightest idea that he is wrong, much less why he’s wrong).

  • The first mistake is that corporations pay a lot of tax (payroll tax, property tax, etc) even if they are losing money and don’t owe any corporate income tax.
  • The second mistakes is that Biden is relying on a report about corporate income taxes that has been debunked because it relied on book income rather than taxable income.
  • The third mistake is that the President implies that his plan force all big companies to pay the corporate tax when that’s obviously not true.

Regarding that third mistake, Kyle Pomerleau of the American Enterprise Institute explains why there will still be companies paying zero corporate income tax.

While the Biden administration’s proposals would increase the tax burden on corporations by about $2 trillion over the next decade, they would not change the basic structure of the corporate income tax. The Democrats’ proposal would not end corporations paying zero federal income tax in certain years. Corporations will still be able to carryforward losses, and credits will still be available for corporations to offset their tax liability. The administration has proposed a minimum tax to address these headlines by tying federal tax liability to book income. The minimum tax would require corporations with net income over $2 billion to pay the greater of their ordinary corporate tax liability or 15 percent of their book or financial statement income. Corporations would still be able to offset the book minimum tax with losses and general business credits.

Glenn Kessler of the Washington Post tried to defend Biden’s tweet as part of his misnamed “Fact Checker.”

He had to acknowledge Biden was using a made-up number, but nonetheless concluded that the President’s assertion was “probably in the ballpark.”

This is one of Biden’s favorite statistics. …the president has used it in speeches or interviews 10 times since April. Normally he is careful to refer to “federal income taxes” so the tweet is little off by referring just to “taxes.” …Let’s dig into this statistic. It’s not necessarily wrong but there are some limitations. …The number comes from…the left-leaning Institute on Taxation and Economic Policy (ITEP). …Company tax returns generally are not made public, so ITEP’s numbers are the product of its own research and analysis of public filings. But it is an imperfect measure. …the information in the filings may not reflect what is in the tax returns. …Nevertheless, the notion that 10 to 20 percent of Fortune 500 companies do not pay federal income taxes is consistent with a 2020 report by the nonpartisan Joint Committee of Taxation. …This “55 corporations” number is probably in the ballpark.

For what it’s worth, I don’t care that Kessler gave Biden a pass for writing “taxes” instead of “federal income taxes.”

After all, that’s almost surely what he meant to write (just like Trump almost surely meant “highest corporate tax rate” when complaining about America being the “highest taxed nation”).

But I’m not in a forgiving mood about the rest of Biden’s tweet (or Kessler’s biased analysis) for the simple reason that there is zero recognition that companies occasionally don’t pay tax for the simple reason that they sometimes lose money.

I’ve made this point when writing about boring issues such as depreciation, carry forwards, and net operating losses.

At the risk of stating the obvious, companies shouldn’t pay any corporate income tax in years when they don’t have any corporate income.

P.S. I’m not mocking Biden’s tweet for partisan reasons. I was similarly critical of one of Trump’s tweets that was glaringly wrong on the issue of trade.

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One of the my favorite publications from the Tax Foundation is the annual International Tax Competitiveness Index (here’s what I wrote in 2020 and 2019).

The 2021 Index, authored by Daniel Bunn and Elke Asen, has now been released, and you can see that Estonia has the most sensible policy.

Other Baltic nations also are highly ranked, as are Switzerland and New Zealand.

It’s probably no surprise to see nations such as France and Italy score so poorly, but Poland is a bit of a surprise.

Since most readers are from the United States, let’s specifically look at America’s rankings.

The U.S. does very will on consumption taxes (ranked #5), largely because we haven’t made the mistake of adding a value-added tax to our system.

By contrast, the U.S. is near the bottom (ranked #32) with regard to cross-border tax rules, though at least America is no longer in last place in that category, as was the case back in 2014.

Here are some additional details for the folks who like to get in the weeds.

The Tax Foundation also released a companion article looking at which nations have enjoyed the biggest improvements or suffered the biggest declines since the Index first began back in 2014.

The United States has been a big winner thanks to the 2017 tax reform, but Israel wins the prize by jumping all the way from #28 to #14.

Colombia has the dubious honor of suffering the biggest decline.

Makes me wonder whether joining the pro-tax OECD (a process that began in 2013) played a role in the country’s shift in the wrong direction.

I’ll close with the sad observation that America’s progress will be reversed if Biden’s class-warfare tax plan is enacted. Earlier this year, the Tax Foundation estimated that the President’s plan would cause the United States to drop eight spots.

Call me crazy, but I don’t understand why folks on the left want the U.S. tax system to be more like Italy’s.

P.S. I would like to see the aggregate tax burden added as one of the variables in the Index, and it also would be interesting if more jurisdictions were included (zero-tax jurisdictions such as Bermuda and the Cayman Islands presumably would beat out Estonia, and it also would be interesting to see where anti-market nations such as China got ranked).

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Reducing the corporate tax rate from 35 percent to 21 percent was the crown jewel of Trump’s 2017 Tax Cut and Jobs Act (TCJA).

  • It was good for workers since a lower rate means more investment, which translates to increased productivity and higher wages.
  • And it was good for U.S. competitiveness since the United States corporate tax rate no longer was the highest in the developed world.

Some critics downplayed those benefits and warned that a lower corporate tax rate would deprive the government of too much revenue.

Since I don’t want politicians to have more money, that was not a persuasive argument. Moreover, I argued during the debate in 2017 that a lower corporate tax rate would generate “revenue feedback.”

In other words, there would be a “Laffer Curve” effect as corporations responded to a lower tax rate by earning and reporting more income.

Based on the latest fiscal data from the Congressional Budget Office (CBO), I was right.

Corporate tax revenues for the 2021 fiscal year (which ended on September 30) were $370 billion. As shown in this chart, that’s only slightly below CBO’s estimate back in 2017 of how much revenue would be collected – $383 billion – if the rate stayed at 35 percent.

The chart also shows CBO’s 2018 estimate of what revenues would be in 2021 with a 21 percent rate (and if you want more data, the Joint Committee on Taxation estimated that the Trump tax reform would reduce corporate revenues in 2021 by $131 billion).

This leads me to ask two questions.

  1. Is this a slam-dunk argument for the Laffer Curve?
  2. Did the lower corporate tax revenue generate so much revenue feedback that it was almost self-financing?

The answer to the first question almost certainly is “yes” but “don’t exaggerate” is probably the prudent response to the second question.

Here are a few reasons to be cautious about making bold assertions.

  • CBO’s pre-TCJA estimate in 2017 may have been wrong for reasons that have nothing to do with the tax rate.
  • CBO’s post-TCJA estimate in 2018 may have been wrong for reasons that have nothing to do with the tax rate.
  • The surge of 2021 revenues may have been a one-time blip that will disappear or fade in the next few years.
  • The coronoavirus pandemic, or the policy response from Washington, may be distorting the numbers.

These are all legitimate caveats, so presumably it would be an exaggeration to simply look at the above chart and claim Trump’s reduction in the corporate tax rate almost “paid for itself.”

But we can look at the chart and state that there was a lot of revenue feedback, which shows that the lower corporate tax rate did produce good economic results.

Perhaps most important, we now have more evidence that Biden’s plan to increase the corporate tax rate is very misguided. Yes, it’s possible that the President’s plan may generate a bit of additional tax revenue, but at a very steep cost for workers, consumers, and shareholders.

P.S. If you want an example of tax cut that was self-financing, check out the IRS data on how much the rich paid before and after the Reagan tax cuts.

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There are many reasons to reject Joe Biden’s proposal for higher corporate tax rates, and I listed many of them when I narrated this nine-minute video.

This two-minute video from the Tax Foundation has a similar message.

The main message is that workers, consumers, and shareholders are the ones who actually pay when suffer when politicians impose higher taxes on business.

And the damage grows over time because higher corporate tax rates reduce investment, which inevitably leads to lower wages.

By the way, while a low tax rate is very important, there are many other policy choices that determine the overall damage of business taxation.

This is just a partial list. There are other policies – such as alternative minimum taxation, book income, loopholes, and extenders – that also can increase the damage of the corporate taxation.

The bottom line is that we know the sensible approach to business taxation, but the Biden Administration is motivated instead by class warfare and grabbing revenue.

P.S. For more information on corporate taxation and wages, click here, here, here, here, and here.

P.P.S. For more information on corporate tax rates and corporate tax revenue, click here, here, here, and here.

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How the Irish Saved Civilization was a bestselling book in the mid-1990s.

Today, we’re going to consider an updated version, focusing on whether Ireland can save the world economy from Joe Biden’s plan for a global tax cartel.

This should be a slam-dunk issue. Ireland transformed itself from “The Sick Man of Europe” to the “Celtic Tiger” in part by adopting a 12.5 percent corporate tax rate.

How much of a tiger? Look at this data comparing per-capita gross domestic product in Ireland and France.

For what it’s worth, the Maddison data on gross domestic product makes Ireland look richer than it actually is (a result driven by largely by all the corporate activity).

So I also used World Bank data on gross national income to create a chart that tells a similar story, but with numbers that presumably are a closer match to actual economic conditions.

The bottom line is that Ireland’s policy on corporate taxation has been a success.

But that success has produced envy. High-tax nations such as France are big supporters of Joe Biden’s scheme to force all jurisdictions to have a corporate tax rate of at least 15 percent.

And that minimum rate inevitably will increase if politicians are able to create a cartel (indeed, some nations already are pushing for the rate to be 25 percent or above).

That’s the bad news.

The good news is that Ireland (as well as other nations such as Hungary and Estonia) presumably can block Biden’s tax cartel by using their “national veto” and preventing the European Union from being a participant.

But that means standing up to pressure.

For instance, the Associated Press recently reported on how France is trying to cajole Ireland into joining the cartel.

Emmanuel Macron was in Dublin for a one-day visit on Thursday, his first trip to Ireland since entering office. The State is facing calls from the French government to sign up to global tax reform. The country is one of only a handful of nations not to agree to a major Organisation for Economic Co-operation and Development (OECD) agreement on tax, which is backed by more than 130 countries worldwide, as well as the EU. …At a press conference in Dublin on Thursday, Mr Macron denied that he was putting pressure on the State on the issue. “This is for you to lead. This is not for France to put pressure. But I think the OECD framework works in the context,” Mr Macron said. “It makes sense in terms of co-operation. It makes sense in terms of the EU. …He said that the Irish economy had achieved “tremendous results” in recent decades and acknowledged that a low corporate tax base had been a crucial part of that success. “What you have managed to do in past decades is unique,” Mr Macron said. But he said that things had to change.

Saul Zimet and Dan Sanchez, writing for the Foundation for Economic Education, explained why Ireland should defends its fiscal sovereignty.

132 countries, including the twenty most powerful economies in the world, have all agreed to institute a minimum global corporate tax of 15 percent. …But, one hold-out is threatening to spoil the scheme. …Ireland has long had a 12.5 percent corporate tax… And this relatively low tax rate has drawn Facebook, Apple, Google, Pfizer, and many other corporate giants to set up regional headquarters or manufacturing hubs there instead of in countries with higher tax rates. …the flow of corporate wealth and opportunity into Ireland has resulted in enormous GDP growth and job growth for the nation in recent decades… Lower corporate taxes mean a bigger capital stock which means new jobs, higher wages, and more goods and services. That is why Ireland’s low corporate taxes have not just been good for multinational corporations, but for Irish workers, consumers, and entrepreneurs. …Jurisdictional competition, like market competition, is a good thing. It places a check on how tyrannical a government can be… So kudos to Ireland for bravely refusing to join what amounts to a 132-government tax cartel. By standing up for itself, it stood up for us all.

In a column for the Wall Street Journal, former Congressman Mick Mulvaney also opined in favor of Ireland.

The premise behind the minimum global corporate tax is simple: Most governments around the world are looking to raise money. But they don’t like taxing the middle class, as this tends to result in lost elections, and there aren’t enough rich people to soak to raise the necessary funds. That means that governments have started to look to corporations as piggy banks they can raid. …the Irish…rode a 12.5% corporate tax rate to an economic boom that has left many other European countries green with envy. …The Irish know what should be obvious to everyone: Their OECD partners can’t raise their corporate rates unless low-tax Ireland agrees to give up one of its largest competitive advantages in the global marketplace. …if you are losing a competition, there are two ways you can respond. One is to get better. The other is to prevent the competition from happening. …Ireland is on the front line of that battle today. Should it lose, the fight will be coming to our shores soon.

Mulvaney’s point about competition is spot on.

Joe Biden wants to raise the federal corporate tax rate from 21 percent to 28 percent, a policy that would give the United States (once again) the developed world’s most punitive system.

I don’t know if Biden is cognizant of the consequences, but his Treasury Secretary clearly understands that this means the United States will lose the battle for jobs and investment.

Which explains why the Biden Administration wants “to prevent the competition from happening.”

Let’s hope Ireland holds firm and says no to Biden’s anti-growth tax cartel.

P.S. For what it’s worth, Ireland failed to block the E.U.’s Lisbon Treaty back in 2009.

P.P.S. The current president of Ireland almost surely is on the wrong side, but fortunately he has very little power in the Irish system.

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I’ve written about some boring and arcane tax issues – most of which are only relevant because we don’t have a simple and fair flat tax.

But I always try to explain why these complicated tax issues are important – assuming we want a competitive tax system that doesn’t needlessly undermine growth.

Today, we’re going to add to our collection of nerdy tax topics by discussing the issue of “book income” vs “tax income.”

I’m motivated to address this topic because the oleaginous senior senator from Massachusetts, Elizabeth Warren, indirectly addressed this issue in a recent column for the Washington Post.

Here’s some of what she wrote.

…scores of giant U.S. corporations pay zero. …In the three years following the 2017 Republican tax cuts, 39 megacorporations, including Amazon and FedEx, reported more than $122 billion in profits to their shareholders while using loopholes, deductions and exemptions to pay zero in federal income taxes. These companies boosted their stock prices and increased CEO pay by telling their shareholders they raked in hundreds of millions of dollars in profits, while simultaneously telling the Internal Revenue Service that they don’t owe any taxes. …We would require any company that earns more than $100 million in profits to pay a 7 percent tax on every dollar earned above that amount.

To assess Warren’s proposal, here are a couple of things that you need to understand.

  1. What corporations report to their shareholders is “book income,” and that number is governed by a specific set of rules (“generally accepted accounting principles” or GAAP) determined by the Financial Accounting Standards Board. The goal is to make sure investors and others have accurate information.
  2. What companies report to the Internal Revenue Service is “tax income” and that number is governed by a specific set of laws (the tax code) enacted over the past 100-plus years by politicians.

In other words, companies are not choosing to play games. They have no choice. They are following two separate sets of requirements that were set up for two separate reasons.

For purposes of public policy, the key thing to understand is that the tax code is based largely on cash flow (what was taxable income over the past 12 months, for instance).

That means it produces annual numbers that can be quite different than book income’s long-run data based on accrual accounting (the GAAP rules).

The Tax Foundation has a recent report, authored by Erica York and Alex Muresianu, that shows why it would be a major mistake to use book income for tax purposes.

Under corporate book income rules, companies spread out the cost of investments across roughly its useful life, also known as economic depreciation. The purpose of this rule is to match costs to the revenues they generate to best inform creditors and shareholders: deducting, say, the entire cost of a new factory the year it’s constructed could make it seem like a company is unprofitable to shareholders. While the economic depreciation approach makes some sense for accounting purposes, it’s a bad framework for tax policy. Spreading out the deductions over time creates a tax bias against investment. Deductions in future years are worth less than deductions in the current year, thanks to the time value of money and inflation. It also creates a bias against companies that rely heavily on physical capital (think energy production and high-tech manufacturing), and towards companies that mostly rely on labor (think financial services or fast food).

It’s unclear whether Senator Warren (or her staff) actually understand these technical details.

Not that it really matters. Her goal is to play class warfare. She’s engaging in demagoguery (a long-standing pattern) in hopes of enacting legislation that will give her a lot more money to spend.

If she’s successful, it will be very bad news for the economy, as Kyle Pomerleau explained in a 2019 report for the Tax Foundation.

According to the Tax Foundation General Equilibrium Model, this proposal would reduce economic output (GDP) by 1.9 percent in the long run. We also estimate that the capital stock would be 3.3 percent smaller and wages 1.5 percent lower, with about 454,000 fewer full-time equivalent jobs. …We estimate that the service price would rise by 2.6 percent under this proposal. A higher service price means that capital investment would become less attractive, leading to reduced investment and, eventually, a smaller capital stock. The smaller capital stock would lead to lower output, lower worker productivity, and lower wages. …Taxpayers in the bottom four income quintiles…would see a reduction in after-tax income of between 1.64 percent and 1.95 percent.

And here’s a table from Kyle’s report with all the economic consequences.

P.S. In her column, Sen. Warren also reiterated her support for a destructive wealth tax and more funding to reward a corrupt IRS.

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I critiqued Biden’s proposal for a global corporate tax cartel as part of a recent discussion with South Africa’s Free Market Foundation.

Here’s the segment where I explain why it would be bad for developing nations.

At the risk of stating the obvious, Joe Biden is pushing this policy because he wants more tax revenue to fund his misguided plan for a bigger welfare state in the United States.

And the same is true for politicians in other big nations such as France, Japan, and Germany.

So as negotiations continue and rules are decided, rest assured that those countries will look after themselves and politicians from developing nations will be lucky to get a few crumbs from the table.

This discussion gives me a good excuse to put together this list of the potential winners and losers from a global tax cartel.

Since I slapped this together in five minutes, I won’t pretend it’s comprehensive.

But it’s hopefully more complete than a simple statement that politicians are the winners and people in the private sector are the losers.

Speaking of losers, my list includes “Nations with sensible tax policy,” and that’s a good reason to share this story from the New York Times. It’s about Janet Yellen’s efforts to convince Irish politicians to sacrifice their nation’s economic advantage.

The United States is hopeful that Ireland will drop its resistance to joining the global tax agreement… The agreement, which gained the support of the Group of 20 nations on Saturday, would usher in a global minimum tax of at least 15 percent. It would also change how taxing rights were allocated, allowing countries to collect levies from large, profitable multinational firms based on where their goods and services were sold. …Ms. Yellen held high-stakes meetings in Brussels this week with Paschal Donohoe, Ireland’s finance minister… She needs Mr. Donohoe’s support because the European Union requires unanimity among its members to formally join the deal.

So you may be wondering what Ms. Yellen said? Did she have some clever and insightful argument of how Ireland would benefit (or at least not be hurt) if politicians create a global tax cartel?

Nope. The best she could come up with is that Ireland’s tax system wouldn’t be as bad as the one she wants for the United States.

Ms. Yellen told her Irish counterpart that Ireland’s economic model would not be upended if it increased its tax rate from 12.5 percent…it would still have a large gap between its rate and the 21 percent tax rate on foreign earnings that the Biden administration has proposed.

And her weak argument is even weaker when you consider that she’s already pushing for a much-higher minimum tax.

The bottom line is that Ireland has reaped enormous benefits from its decision to enact a low corporate tax rate. But if a global tax cartel is imposed, it would simply be a matter of time before that country gets relegated to being an economic backwater on the periphery of Europe.

P.S. Part of the discussion in the video was about developing nations having the right to copy the economic model (no income tax and no welfare state) that enabled North American and Western Europe to become rich in the 1800s. Sadly, I don’t think many politicians in the developing world are interested in that approach nowadays, but rich nations shouldn’t make it impossible.

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When President Biden proposed a “global minimum tax” for businesses, I immediately warned that would lead to ever-increasing tax rates.

Ross Kaminsky of KHOW and I discussed how this is already happening.

I hate being right, but it’s always safe to predict that politicians and bureaucrats will embrace policies that give more power to government.

Especially when they are very anxious to stifle tax competition.

For decades, people in government have been upset that the tax cuts implemented by Ronald Reagan and Margaret Thatcher triggered a four-decade trend of lower tax rates and pro-growth tax reform.

That’s the reason Biden and his Treasury Secretary proposed a 15 percent minimum tax rate for businesses.

And it’s the reason they now want the rate to be even higher.

Though even I’m surprised that they’re already pushing for that outcome when the original pact hasn’t even been approved or implemented.

Here are some passages from a report by Reuters.

Treasury Secretary Janet Yellen will press G20 counterparts this week for a global minimum corporate tax rate above the 15% floor agreed by 130 countries last week…the global minimum tax rate…is tied to the outcome of legislation to raise the U.S. minimum tax rate, a Treasury official said. The Biden administration has proposed doubling the U.S. minimum tax on corporations overseas intangible income to 21% along with a new companion “enforcement” tax that would deny deductions to companies for tax payments to countries that fail to adopt the new global minimum rate. The officials said several countries were pushing for a rate above 15%, along with the United States.

Other kleptocratic governments naturally want the same thing.

A G7 proposal for a global minimum tax rate of 15% is too low and a rate of at least 21% is needed, Argentina’s finance minister said on Monday, leading a push by some developing countries… “The 15% rate is way too low,” Argentine Finance Minister Martin Guzman told an online panel hosted by the Independent Commission for the Reform of International Corporate Taxation. …”The minimum rate being proposed would not do much to countries in Africa…,” Mathew Gbonjubola, Nigeria’s tax policy director, told the same conference.

Needless to say, I’m not surprised that Argentina is on the wrong side.

And supporters of class warfare also are agitating for a higher minimum rate. Here are some excerpts from a column in the New York Times by Gabriel Zucman and Gus Wezerek.

In the decades after World War II, close to 50 percent of American companies’ earnings went to state and federal taxes. …it was a golden period. …President Biden should be applauded for trying to end the race to the bottom on corporate tax rates. But even if Congress approves the 15 percent global minimum corporate tax, it won’t be enough. …the Biden administration to give working families a real leg up, it should push Congress to enact a 25 percent minimum tax, which would bring in about $200 billion in additional revenue each year. …With a 25 percent minimum corporate tax, the Biden administration would begin to reverse decades of growing inequality. And it would encourage other countries to do the same, replacing a race to the bottom with a sprint to the top.

I can’t resist making two observations about this ideological screed.

  1. Even the IMF and OECD agree that the so-called race to the bottom has not led to a decline in corporate tax revenues, even when measured as a share of economic output.
  2. Since companies legally avoid rather than illegally evade taxes, the headline of the column is utterly dishonest – but it’s what we’ve learned to expect from the New York Times.

The only good thing about the Zucman-Wezerek column is that it includes this chart showing how corporate tax rates have dramatically declined since 1980.

P.S. For those interested, the horizontal line at the bottom is for Bermuda, though other jurisdictions (such as Monaco and the Cayman Islands) also deserve credit for having no corporate income taxes.

P.P.S. If you want to know why high corporate tax rates are misguided, click here. And if you want to know why Biden’s plan to raise the U.S. corporate tax rate is misguided, click here. Or here. Or here.

P.P.P.S. And if you want more information about why Biden’s global tax cartel is bad, click here, here, and here.

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I’ve been arguing against Biden’s proposed increase in business taxation by pointing out that higher corporate taxes will be bad news for workers, consumers, and shareholders.

Everyone agrees that shareholders get hurt. After all, they’re the owners of the businesses. Higher corporate taxes directly reduce the amount of money available to be paid as dividends.

But we also should recognize that higher corporate taxes can be passed along to consumers, so they also lose. Even more important, we should recognize that higher tax burdens also reduce incentives for business investment, and this can have a negative impact on worker compensation.

A 2017 study from the Tax Foundation, authored by Steve Entin, thoroughly explored this question and included a table summarizing the academic research.

Alex Durante updated the Tax Foundation’s summary of the research in a just-released report.

Here are the results of two new studies.

In a large study of German municipalities over a 20-year period, Fuest et al. (2018) find that slightly more than half of the corporate tax burden falls on workers. …Baker et al. (2020) find that consumers could also be impacted by corporate tax changes. Looking at specific product prices with linked survey and administrative data at the state level, the authors found that a 1 percentage-point increase in the corporate tax rate increased retail prices by 0.17 percent. Combining this estimate with the wage response estimated in Fuest et al., the authors calculated that 31 percent of the corporate tax incidence falls on consumers, 38 percent on workers, and 31 percent on shareholders.

If you want more information about the German study, I wrote about it a couple of years ago. Solid research.

Here’s my two cents on the issue: Shareholders pay 100 percent of the direct costs of the corporate tax. But we need to also consider the indirect costs, most notably who bears the burden when there’s less investment and slower wage growth.

If you ask five economists for their estimates of indirect costs, you’ll probably get nine different answers. So it’s no surprise that there’s no agreement about magnitudes in the academic research cited above.

But they all agree that workers lose when corporate rates increase, and that’s a big reason why we can confidently state that Biden’s class-warfare agenda is bad for ordinary people.

The bottom line is that the person (or business) writing a check to the IRS isn’t the only person who suffers because of a tax.

And the lesson to learn is that we should be lowering the corporate, not increasing it.

P.S. Here’s my primer on the overall issue of corporate taxation.

P.P.S. Here’s some research about the link between corporate tax and investment.

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Yesterday’s column explained why Biden’s proposed global cartel for corporate taxation was a bad idea.

In this clip from a recent panel hosted by the Austrian Economics Center in Vienna, I speculated on whether the plan would become reality.

I encourage you to watch the 4-minute video, but all you really need to know is that there are lots of obstacles to a cartel. Most notably, countries with pro-growth business tax regimes (such as Ireland, Estonia, and Switzerland in Europe) have big incentives to say no.

And if legislation is required in the United States, I assume that won’t be an easy sell, at least for GOP members.

But, as I warn in the video, the other side has hundreds of bureaucrats at the OECD and various finance ministries and treasury departments. And these taxpayer-financed mandarins have both the time and patience to chip away until they achieve their goals.

So it is critical that economists such as myself do a good job of educating policy makers about the adverse consequences of a tax cartel.

Which is why people should read this column by Veronique de Rugy of the Mercatus Center. Here are some key excerpts.

For several decades now, politicians around the world have tried to curtail tax competition to make it easier for them to increase the tax burdens on their citizens without them fleeing to other lower-tax jurisdictions. The best way to achieve their goal is to create a global high-tax cartel. …It’s no mystery why politicians don’t like tax competition. …The ability to shift residences and operations from country to country puts pressure on governments to keep taxes on income, investment, and wealth lower than politicians would like. Politicians in each country fear that raising taxes will prompt high-income earners and capital to move away. …Academic research shows that the imposition of higher corporate taxes is a highly destructive way to collect revenue because it lowers investment and, in turn, workers’ wages. It also increases consumer prices. Also, let’s face it, no nation has ever become wealthier and better through higher taxes and wealth redistribution.

This column for Prof. Bruce Yandle also is very informative. Here’s some of what he wrote.

It was with a feeling of deep disappointment…that I read Treasury Secretary Janet Yellen is…pushing to form an international cartel of governments that would implement a minimum corporate income tax rate across borders. …Efforts to cartelize taxation among nations will…, all else equal, lead to a higher-cost world economy. …Instead of searching high and low for ways to raise costs in the hope that more federal revenue and spending will follow, we should hope that our national leaders work harder to find better, more efficient ways to govern and serve the people. Doing so will give more people a much better chance at prosperity.

Amen. Tax harmonization was most accurately described by a former member of the European Parliament, who said it was a “thieves’ cartel.”

P.S. One of the worst aspects of the proposed tax cartel is that it will make it more difficult for poor countries to use good policy to improve living standards for their people.

P.P.S. Click here for my primer on tax competition.

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When governments have to compete with each other, we get lower tax rates. That’s good for taxpayers and good for growth.

But politicians hate limits on their taxing power, which is why Biden has proposed a global tax cartel. Here are some of my remarks made yesterday on this topic.

If you don’t have time to watch the video, here are the key points I made when asked about the impact of Biden’s scheme.

  • The tax cartel is a naked grab for more revenue.
  • Higher taxes on businesses arguably are the worst way to collect more tax revenue. Indeed, both the IMF and OECD have research showing the destructive impact of higher corporate tax burdens.
  • The global minimum tax will lead to a couple of additional bad consequences. 1) The 15 percent rate will be increased, and 2) Cartels will be created for other taxes.

I was then asked about whether there are better ways of generating revenue, particularly by having economic policies that lead to more growth.

This presumably was an opportunity for me to pontificate about the Laffer Curve, but I decided to make a more fundamental point about how politicians should not have more money.

I closed my remarks by pointing out that the world enjoyed an era of falling tax rates, which began when Reagan and Thatcher slashed tax rates about 40 years ago.

The average top personal tax rate in the developed world dropped from nearly 70 percent to just a bit over 40 percent.

The average corporate tax rate in industrialized nations dropped from nearly 50 percent to less than 25 percent.

Other nations didn’t copy the U.S. and U.K. because politicians were reading my boring articles about marginal tax rates. Instead, they only did the right thing because they were worried about losing jobs and investment.

One point I forgot to make (particularly in response to the second question) is that I should have explained that tax revenues as a share of GDP did not fall when tax rates were reduced.

Indeed, OECD data shows that tax revenues on income and profits (as a share of GDP) actually have risen during the period of falling tax rates.

The bottom line is that we need tax competition to protect us from “stationary bandits” who would produce “goldfish government.”

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Biden’s tax agenda – especially the proposed increase in the corporate rate – would be very bad for American competitiveness.

We know this is true because the Administration wants to violate the sovereignty of other nations with a scheme that would require all nations to impose a minimum corporate tax rate of 15 percent.

Indeed, the White House openly says it wants to export bad policy to other nations “so that foreign corporations aren’t advantaged and foreign countries can’t try to get a competitive edge.”

Other big nations (the infamous G-7) just announced they want to participate in the proposed tax cartel.

I was just interviewed on this topic by the BBC World Service and I’ve extracted my most important quotes.

But I encourage you to listen to the full discussion, which starts with (predictably awful) comments from the French Finance Minister, followed by a couple of minutes of my sage observations.

For what it’s worth, “reprehensible” doesn’t begin to capture my disdain for what the politicians are trying to achieve.

What’s particularly irritating is that politicians want us to think that companies are engaging in rogue tax avoidance. Yet, as I noted in the interview, national governments already have the ability to reject overly aggressive forms of tax planning by multinational firms.

Here’s some of what was reported about the proposed cartel by the Associated Press.

The Group of Seven wealthy democracies agreed Saturday to support a global minimum corporate tax of at least 15%… U.S. Treasury Secretary Janet Yellen said the agreement “provides tremendous momentum” for reaching a global deal that “would end the race-to-the-bottom in corporate taxation…” The endorsement from the G-7 could help build momentum for a deal in wider talks among more than 135 countries being held in Paris as well as a Group of 20 finance ministers meeting in Venice in July. …The Group of 7 is an informal forum among Canada, France, Germany, Italy, Japan, the UK and the United States. European Union representatives also attend. Its decisions are not legally binding, but leaders can use the forum to exert political influence.

As you just read, the battle is not lost. Hopefully, the jurisdictions with good corporate tax policy (Ireland, Bermuda, Hong Kong, Cayman Islands, Switzerland, etc) will resist pressure and thus cripple Biden’s cartel.

I’ll close by emphasizing that the world needs tax competition as a necessary check on the greed of politicians. Without any sort of constraint, elected officials will over-tax and over-spend.

Which is why they’re trying to impose a tax cartel. They don’t want any limits on their ability to buy votes with other people’s money.

And we can see from Greece what then happens.

P.S. The Trump Administration also was awful on the issue of tax competition.

P.P.S. Here’s my most-recent column about the so-called “race to the bottom.”

P.P.P.S. As noted in the interview, both the IMF and OECD have research showing the destructive impact of higher corporate tax burdens.

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In the world of public finance, Ireland is best known for its 12.5 percent corporate tax rate.

That’s a very admirable policy, as will be momentarily discussed, but my favorite Irish policy was the four-year spending freeze in the late 1980s.

I discussed that fiscal reform in a video about 10 years ago, and I subsequently shared data on how spending restraint reduced the overall burden of government in Ireland and also lowered red ink.

It’s a great case study showing the beneficial impact of my Golden Rule.

Spending restraint also paved the way for better tax policy, and that’s a perfect excuse to discuss Ireland’s pro-growth corporate tax system. The Wall Street Journal opined last week about that successful supply-side experiment.

Democrats want a high global minimum tax that would end national tax competition and reduce the harm from their huge tax increase on U.S. business. But tax competition has been a boon to global growth and investment, as Ireland’s famous low-tax policy makes clear. Far from a “race to the bottom,” Ireland adopted policies that were ahead of their time and helped its economy grow from a backwater into a Celtic tiger. …in the late 1990s …an EU mandate led Dublin to…pioneer…a new strategy: Apply the same low tax rate to every business. Policy makers settled on 12.5%, which was a tax increase for some companies but a cut for others. This was a classic flat-tax reform… Ireland has reaped the benefits. Between 1986 and 2006, the economy grew to nearly 140% of the EU average from a mere two-thirds. Employment nearly doubled to two million, and the brain drain of the 1970s and 1980s reversed. …Oh and by the way: After Ireland slashed its rate and broadened the corporate-tax base, tax revenue soared. Except for the post-2008 recession and its aftermath, corporate-profits taxes in some years account for about 13% of total revenue and exceed 3% of GDP. That’s up from as low as 5% of revenue and less than 2% of GDP before the current tax rate was introduced.

That’s a lot of great information, particularly the last couple of sentences about how Ireland collected more revenue when the corporate tax rate was slashed.

Indeed, I discussed that remarkable development in Part II of my video series on the Laffer Curve (and it’s not just an Irish phenomenon since both the IMF and OECD have persuasive global data on lower corporate tax rates and revenue feedback).

Though higher revenue is not necessarily a good thing.

I complained back in 2011, for example, about how Irish politicians began to spend too much money once a booming economy began to generate a lot of tax revenue.

Which is a good argument for a Swiss-style spending cap in Ireland.

Let’s wrap up by considering some fiscal lessons from Ireland. Here are four things everyone should know.

  1. Spending restraint is a powerful tool to achieve smaller government..
  2. Lower tax rates on productive behavior lead to jobs and prosperity.
  3. Lower corporate tax rates can generate substantial revenue feedback.
  4. A spending cap is needed to maintain long-run fiscal discipline.

Good rules for Ireland. Good rules for any nation.

P.S. Ireland has definitely prospered in recent decades, but GNI data gives a more accurate picture than GDP data.

July 29, 2021 Addendum: This chart shows the growth Ireland has experienced since starting to adopt pro-market policies in the mid-1980s.

Even though the nation got hit hard by the financial crisis, it is still far ahead of where it was before reforms.

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As explained here, here, here, and here, I don’t like Biden’s class-warfare tax policy.

I’m especially concerned about his approach to business taxation.

  1. He wants to penalize American-based companies with the highest corporate tax rate among all developed nations.
  2. He wants to export that bad policy to the rest of the world with a “global minimum tax” – sort of an OPEC for politicians.
  3. He wants to handicap American multinational companies with taxes that don’t apply to foreign-based firms.

Regarding the third point, I wrote a column on that topic for the Orange County Register.

Here’s how I described Biden’s proposal.

Biden has proposed several tax increases that specifically target American firms that compete in world markets. Most notably, the Administration has proposed to double the tax rate on “global intangible low-tax income” (GILTI) from 10.5 percent to 21 percent. Translated from tax jargon to English, this is largely a tax on the income American firms earn overseas from intellectual property, most notably patents and royalties. Keep in mind, by the way, that this income already is subject to tax in the nations where it is earned. Most other nations do not handicap their companies with similar policies, so this means that American firms will face a big competitive disadvantage – especially when fighting for business in low-tax jurisdictions such as Hong Kong, Ireland, Singapore, Switzerland, and most of Eastern Europe.

And here are some additional reasons why it is very bad news.

…let’s simply look at the bottom-line impact of what Biden is proposing. The Tax Foundation estimates that, “The proposal would impose a 9.4 percent average surtax on the foreign activities of U.S. multinationals above and beyond the taxes levied by foreign governments” and “put U.S. multinationals at a competitive disadvantage relative to foreign corporations.” …a stagging $1.2 trillion tax increase on these companies. …This is not just bad for the competitiveness of American-based companies, it is also bad policy. Good fiscal systems, such as the flat tax, are based on “territorial taxation,” which is the common-sense notion that countries only tax economic activity inside their borders. …Many other nations follow this approach, which is why they will reap big benefits if Biden’s plan to hamstring American companies is approved. The key thing to understand is that the folks in Washington have the power to raise taxes on American companies competing abroad, but they don’t have the ability to raise taxes on the foreign companies in those overseas markets.

The Wall Street Journal‘s editorial page has been sounding the alarm on this issue as well.

Here are some excerpts from an editorial back in April.

…the tax on global intangible low-tax income, known as Gilti, which was created by the 2017 tax reform. …Gilti was flawed from the start…but Mr. Biden would make it worse in every respect. …The 2017 tax law set the statutory Gilti rate at…10.5%. Mr. Biden would increase that to 21%… the effective rate companies actually pay is higher. This is because Gilti embedded double taxation in the tax code. …Gilti allows a credit of only 80% of foreign taxes, with no carry-forwards or carry-backs. …Raising the statutory rate to 21% increases that effective rate to 26.25%. This new Biden effective minimum tax would be higher than the statutory tax rates in most countries even in Western Europe… The Biden plan would further increase the effective Gilti rate by expanding the tax base on which it’s paid. …A third Biden whammy would require companies to calculate tax bills on a country-by-country basis. …Requiring companies to calculate taxable profits and tax credits individually for every country in which a company operates will create a mountain of compliance costs for business and work for the Internal Revenue Service. …The Biden Administration and its progressive political masters have decided they don’t care about the global competitiveness of American companies.

Let’s close with some international comparisons.

According to the most-recent International Tax Competitiveness Index, the United States ranks #21 out of 35 nations, which is a mediocre score.

But the United States had been scoring near the bottom, year after year, before the Trump tax reform bumped America up to #21. So there was some progress.

If the Biden plan is approved, however, it is a near-certainly that the U.S. will be once again mired at the bottom. And this bad policy will lead to unfortunate results for American workers and American competitiveness.

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There are two big policy debates about business profits.

The first is whether profits are good or evil. I pick the former. Profits are something to applaud, assuming they are earned honestly (i.e., not the result of subsidies, industrial policy, protectionism, or other forms of cronyism).

The second is how profits should be taxed, and that’s the focus of today’s column.

My perfect-world answer is that there should be no tax on profits because we have a government that is so small that there’s no need for any type of income tax. But I’m in the United States rather than a fiscal paradise such as Bermuda, Monaco, or the Cayman Islands. So if we start with the assumption that a corporate income tax is going to exist, how should it operate?

To answer that question, let’s start with this simple example of a kid’s lemonade stand. Here’s how much money it spent and how much revenue it generated (before it was shut down by overzealous bureaucrats).

How much profit did our budding entrepreneur make?

The correct answer, of course, is that the business didn’t earn any profits. Indeed, it lost $2. So there obviously should not be any tax.

But some people don’t understand the difference between taxable income (which is largely based on cash flow in one year) and “book income” (which is largely a backward-looking, accrual-based estimate of profits to help inform shareholders about the overall financial condition of a corporation).

Or, maybe they do understand and simply prefer to engage in dishonest demagoguery. For instance, let’s look at a recent report by Patricia Cohen in the New York Times.

…a new study finds that at least 55 of America’s largest paid no taxes last year on billions of dollars in profits…thanks to a range of legal deductions and exemptions that have become staples of the tax code, according to the analysis. Salesforce, Archer-Daniels-Midland and Consolidated Edison were among those named in the report, which was done by the Institute on Taxation and Economic Policy, a left-leaning research group in Washington. …Twenty-six of the companies listed, including FedEx, Duke Energy and Nike, were able to avoid paying any federal income tax for the last three years even though they reported a combined income of $77 billion. Many also received millions of dollars in tax rebates.

Sounds terrible, right.

Except if you read the fine print, in which case you’ll find out the report discussed in the article isn’t based on company tax returns. Instead, the leftist group, the Institute on Taxation and Economic Policy (ITEP), used financial statements to make up some numbers.

And ITEP’s use of book income meant it didn’t properly measure things such as business investment expenditures and net operating losses, which are necessary to determine whether a company has an actual cash-flow profit.

Ms. Cohen never should have written a story about ITEP’s shoddy and dishonest report, though at least she acknowledged that there are reasons to question the findings.

A provision in the 2017 tax bill allowed businesses to immediately write off the cost of any new equipment and machinery. The $2.2 trillion CARES Act…included a provision that temporarily allowed businesses to use losses in 2020 to offset profits earned in previous years, according to the institute. …many deductions and credits are there for good reason — to encourage research and development, to promote expansion and to smooth the ups and downs of the business cycle, taking a longer view of profit and loss than can be calculated in a single year.

The bottom line is that the ITEP report is garbage.

There’s no reason to expect taxable income to match up with financial statements or “book income.”

Indeed, the differences between those measures is why there are also companies that – according to ITEP’s sloppy methodology – pay tax when they supposedly have losses.

For those who actually care about the truth, the top half of this visual shows how a proper business tax system should work (i.e., one that taxes profits when they actually occur).

P.S. The issue of “depreciation” is probably the main reason why we get all sorts of silly tax controversies, involving everything from corporate jets to ABBA’s stage outfits.

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I have a four-part series (here, here, here, and here) about the conceptual downsides of Joe Biden’s class-warfare approach to tax policy.

Now it’s time to focus on the component parts of his agenda. Today’s column will review his plan for a big increase in the corporate tax rate. But since I’ve written about corporate tax rates over and over and over again, we’re going to approach this issue is a new way.

I’m going to share five visuals that (hopefully) make a compelling case why higher tax rates on companies would be a big mistake.

Visual #1

One thing every student should learn from an introductory economics class is that corporations don’t actually pay tax. Instead, businesses collect taxes that are actually borne by workers, consumers, and investors.

There’s lots of debate in the profession, of course, about which group bears what share of the tax. But there’s universal agreement that higher taxes lead to less investment, which leads to less productivity, which leads to lower pay.

Here’s a depiction of the relationship of corporate taxes and worker pay.

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Visual #2

The previous image explains the theory. Now it’s time for some evidence.

Here’s a look at how much faster wages have grown in countries with low corporate tax rates compared to nations with high corporate tax rates.

Biden, for reasons beyond my comprehension, wants America on the red line.

And his staff economists apparently don’t understand (or don’t care about) the link between investment and wages.

Visual #3

Here’s some more evidence.

And it comes from an unexpected source, the pro-tax Organization for Economic Cooperation and Development (OECD).

Even economists at that Paris-based bureaucracy have produced studies confirming that lower tax rates lead to higher disposable income for people.

Needless to say, if lower tax rates lead to more disposable income, then higher tax rates will lead to less disposable income.

We should have learned during the Obama years that ordinary people pay the price when politicians practice class warfare.

Visual #4

It’s very bad news that Biden wants a big increase in the corporate tax rate, but let’s not forget that the IRS double-taxes corporate income (i.e., that same income is subject to a second layer of tax when shareholders receive dividends).

The combined effect, as shown in this visual, is that the United States will have the dubious honor of having the highest effective corporate tax rate in the entire developed world.

Call me crazy, but I don’t think that’s a recipe for jobs and investment in America.

Visual #5

The economic damage of higher corporate tax rates means that there is less taxable income (i.e., we need to remember the Laffer Curve).

Will the damage be so extensive, causing taxable income to fall so much, that the IRS collects less revenue with a higher tax rate?

We’ll learn the answer to that question over time, but we have some very strong evidence from the IMF that lower corporate tax rates don’t lead to less revenue. As you can see from this chart, revenues held steady as tax rates plummeted over the past few decades.

In other words, lower rates led to enough additional economic activity that governments have collected just as much money with lower tax rates. But now Biden wants to run this experiment in reverse.

It’s possible the government will collect more revenue, of course, but only at a very high cost to workers, consumers, and shareholders.

By the way, there’s OECD data showing the exact same thing.

Those pictures probably tell you everything you need to know about this issue.

But let’s add some more analysis. The Wall Street Journal opined today on Biden’s class-warfare agenda. Here are some of the key passages from the editorial.

The bill for President Biden’s agenda is coming due, starting with Wednesday’s proposal for the largest corporate tax increase in decades. …Mr. Biden’s corporate increase amounts to the restoration of the Obama-era corporate tax burden, only much more so. …Mr. Biden wants to raise the corporate rate back up to 28%, but that’s the least of his proposals. He also wants to add penalties that would make inversions punitive, and he’d impose a global minimum corporate tax of 21%. This would shoot the tax burden on U.S. companies back toward the top of the developed world list. …The larger Biden goal is to end global tax competition… “The United States can lead the world to end the race to the bottom on corporate tax rates,” says the White House fact sheet. Mr. Biden says he wants “other countries to adopt strong minimum taxes on corporations” so nations like Ireland can no longer compete for capital with lower tax rates. This has long been the dream of the French and Germans, working through the Organization for Economic Cooperation and Development. …All of this is in addition to the looming Biden tax increases on dividends, capital gains and other investment income. …Mr. Biden’s corporate tax increases will hit the middle class hard—in the value of their 401(k)s, the size of their pay packets, and what they pay for goods and services.

Amen.

Let’s conclude with some gallows humor.

This meme shows how some of our leftist friends will celebrate if the tax increase is imposed.

P.S. Here’s a depressing final observation. Decades of experience have led me to conclude that many folks on the left support class-warfare tax policy because they are primarily motivated by a spiteful desire to punish success rather than provide upward mobility for the poor.

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Thanks to globalization (as opposed to globalism), jobs and investment are now very mobile. This means the costs of bad policy are higher than ever before, and it also means the benefits of good policy are higher than ever before.

Which is why it’s very useful to look at various competitiveness rankings, most notably the ones that are comprehensive (most notably Economic Freedom of the World and the Index of Economic Freedom).

But since my specialty is public finance, I’m also interested in measures of fiscal competitiveness (best tax system, worst tax system, costliest welfare state, etc).

Today, let’s narrow our focus and look at business tax competitiveness. This is an area where the United States traditionally has lagged, both because we used to have one of the world’s highest corporate tax rates and because onerous tax rules put U.S.-based companies at an added disadvantage.

Trump lowered the federal corporate tax rate from 35 percent to 21 percent, which definitely helped, but now Biden wants to push the rate back up to 28 percent.

What will that mean for U.S. competitiveness?

It’s not good news.

The Tax Foundation calculated the combined tax rate on business income (including the double tax on dividends) for various developed nations.

As you can see, America will have the most onerous tax regime if Biden is successful.

What if we look only at the corporate tax rate? And what if we consider every jurisdiction in the world?

Professor Robert McGee pulled together all the numbers and ranked nations from #1 to #223.

The United States currently is in the bottom half, which isn’t good since we’re below average. But you can see from these two tables that Biden will drop America to the bottom 10 percent.

Needless to say, it’s not good to rank below France.

But let’s think of the glass as being 1/10th full rather than 9/10ths empty. At least the U.S. beats Venezuela!

The bottom line is that it will not be good news if Biden’s plan is enacted.

P.S. From Professor McGee’s study, here are the jurisdictions tied for 1st place.

P.P.S. Needless to say, politicians from high-tax nations resent the 15 jurisdictions that don’t have a corporate income tax.

Indeed, that’s why many of those politicians are pushing the “global minimum tax” that I wrote about yesterday.

Those politicians basically want to turn back the clock and reverse the progress depicted in this set of charts from the Tax Foundation.

P.P.S. This is why it’s important to defend the liberalizing process of tax competition.

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I’m not a big fan of the Organization for Economic Cooperation and Development. Simply stated, the Paris-based international bureaucracy represents the interests of governments, and that means the OECD often pushes policies that serve the interests of politicians at the expense of taxpayers and consumers.

I’m particularly irked that OECD bureaucrats spend so much time and effort persecuting low-tax jurisdictions. And some of their work on issues such as poverty and inequality is grotesquely dishonest and sloppy.

But there are some good economists at the OECD. They’re apparently not allowed to have any role in policy, much to my dismay, but they occasionally produce very good research studies.

Such as the 2016 study that showed how many European welfare states would enjoy big increases in prosperity if they reduced the burden of government spending.

And the pair of studies that concluded spending caps were the most effective rule for sensible fiscal policy.

Or the study admitting that competition between governments leads to better tax policy.

Today, let’s look at another example of sensible analysis by OECD economists.

In a study published in late 2017, Oguzhan Akgun, Boris Cournède and Jean-Marc Fournier examined how different types of taxes impacted economic performance.

Lo and behold, they found that it’s good to have lower tax rates on businesses and it’s good to have lower tax rates on workers.

The present paper looks at the long-term effects of tax shifts on inequality and output for an unchanged size of government. …This study uses econometric analysis to provide estimates of distributional and output effects that can be expected based on the track record in OECD countries. …The main findings emerging from the analysis are: …Higher marginal effective rates of corporate income taxation are linked with significantly lower long-term output levels. …Greater progressivity in the upper half of the income distribution, in the form of higher tax wedges on above average income earners, is linked with lower long-term output. …taxes on net wealth are found to be associated with lower output levels, in line with the literature on their distortive effects.

These finding are not a surprise, particularly for people who read the Tax Foundation’s research back in 2016.

Here’s the key visual from the OECD study. The top half shows how many nations could enjoy significant gains in disposable income if tax rates were lowered on workers with above-average incomes. The lower half shows how many nations also could enjoy gains in disposable income

The obvious takeaway is that the study shows that Biden’s class-warfare tax agenda will be bad for American competitiveness and American prosperity.

There are many other findings in the study, not all of which I like, and not all of which make sense.

For instance, the authors want us to believe that death taxes may actually have a positive impact on the economy.

Greater reliance on inheritance and gift taxes…appears to be output-enhancing by comparison with other revenue sources.

I realize the study is only claiming that such taxes are less damaging than other taxes, but it still doesn’t make sense since death taxes directly drain capital out of the economy’s productive sector.

The study also look at the impact of various tax changes on “inequality,” leading the authors to give a negative assessment to some tax cuts even if those reforms would increase the well-being of those with lower incomes (thus confirming Margaret Thatcher’s warning that some folks on the left are willing to hurt the poor if the rich are hurt by a greater amount).

I’ll close with two other findings from the study, both of which are more to my liking.

First, we find that consumption taxes (such as the value-added tax) hurt the economy, but not as much as income taxes.

Consumption taxes entail some disincentive effects, which are generally found to be weaker than those of income taxes.

Second, green taxes hurt the poor more than they hurt the rich.

…environmental taxes can increase inequality.

Given all the rich hypocrites on this issue, this doesn’t surprise me. They know they won’t be the main victims.

For what it’s worth, the OECD nonetheless wants a big energy tax on American families (thus confirming once again that there’s a disconnect between the left-leaning political types who are in charge and the professional economists who do real research).

P.S. Even if some OECD economists do good work, American taxpayers should not be subsidizing the group.

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After November’s election, I figured we would have gridlock. Biden would propose some statist ideas, but they would be blocked by Republicans in the Senate.

All things considered, not a bad outcome.

But Democrats won the run-off elections yesterday for both Georgia Senate seats, which means they now have total control of Washington.

And that means, as I recently warned, a much bigger threat that Biden’s proposed tax increases may get enacted.

That won’t be good news for America’s economy or American competitiveness.

Today, let’s focus on the biggest tax increase that the President Elect is proposing.

In an article for National Review, Joseph Sullivan writes about the adverse impact of Biden’s increase in the corporate tax rate.

Biden’s corporate-tax proposal is remarkable. …If the U.S. adopted Biden’s proposed federal tax rate, its overall corporate-tax rate would not be “in line” with the rest of the G7. Assuming U.S. state and local corporate taxes stayed the same, Biden’s proposal would result in nearly the highest overall corporate-tax rate in the G7, according to data from the OECD. The U.S. would be tied with France. …The average overall corporate rate among the G7 has fallen to 25 percent… With the G7 average trending in one direction, Biden would move the U.S. in the opposite direction.

In other words, while the Biden team claims that a higher corporate tax won’t be too damaging because it will be similar to the rate in other major nations, the U.S. actually will be tied with France once you include the impact of state corporate tax burdens.

Here’s the chart included with the article.

And don’t forget that there are many other economies where the corporate tax rate is well below the G7 average.

The bottom line is that the United States currently ranks only #19 out of 35 nations in the Tax Foundation’s competitiveness ranking for OECD nations.

The good news is that being #19 is much better than being #31, which is where the U.S. was in 2016.

The bad news is that Biden wants to undo much of the 2017 reform, as well as impose other tax increases. And that means a much lower competitiveness score in the future.

Which ultimately means lower wages for American workers.

P.S. Although the proposed increase in the corporate rate is theoretically the biggest revenue raiser in Biden’s tax plan, I will safely predict that it won’t raise nearly as much revenue as projected by static revenue estimates. I wasn’t able to educate Obama on this issue, and I’m even less hopeful of getting through to Biden.

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In a new documentary film, Race to the Bottom, I had an opportunity to pontificate briefly about corporate tax and the Laffer Curve.

At the risk of understatement, I represented a minority viewpoint in the documentary. Most of the people interviewed had a negative view of tax competition, considering it to be (as suggested by the title) a “race to the bottom.”

By contrast, I view tax competition as a way of constraining the “stationary bandit” so that we don’t wind up with “goldfish government.”

For purposes of today’s column, though, I want to focus on the narrower issue of the relationship between corporate tax rates and corporate tax revenue.

In the above video, I asserted that lower rates did not result in lower revenue. Indeed, I even made the bold statement that revenues increased.

Is that correct?

Fortunately, I don’t need to do any elaborate calculations to prove my point. I’ll simply direct readers to the work of two left-leaning international bureaucracies.

Back in 2017, I cited an article form the International Monetary Fund that included a graph clearly illustrating that the drop in tax rates has not been accompanied by a drop in tax revenue.

This was a remarkable admission considering that the article argued in favor of higher tax burdens.

Likewise, last year I cited a study from the Organization for Economic Cooperation and Development that also acknowledged that falling tax rates on companies did not translate into lower revenues.

Given that the OECD has a big project to increase business tax burdens, that also was a startling admission.

None of this means, by the way, that lower rates always lead to more revenue.

Indeed, most tax cuts cause revenue to decline (though not as much as predicted by static estimates).

The bottom line is that lower tax rates are good for economic performance and my friends on the left shouldn’t get too worried about disappearing tax revenue.

P.S. There’s also some 2017 OECD data and 2018 OECD data about business tax rates and business tax revenues.

P.P.S. Earlier this year, I cited OECD data that also included personal income tax rates and tax revenue.

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With the election less than two months away, there’s a lot of discussion and debate about Trump’s performance.

I put together a report card last year showing that his economic policies have been a mixed bag, with good grades on tax and regulation, but bad grades on trade and spending.

Today, let’s focus specifically on fiscal issues and try to identify the best and worst changes that have occurred during his presidency.

Let’s start with the good news.

For what it’s worth, I’m somewhat conflicted between two different provisions of the 2017 tax reform.

I’m a huge fan of the cap on the state and local tax deduction. For years, I had been arguing that it was very foolish for the federal tax system to subsidize high-tax states.

So I was delighted that the 2017 law restricted this subsidy (and I’m further delighted that we’re already seeing a positive impact with people “voting with their feet” against states such as New York, Illinois, and California).

However, that reform is not permanent. Like many other provisions of that law, it automatically expires at the end of 2025.

Which is why I’m going to choose the lower corporate tax rate as Trump’s best policy. Not only is that reform permanent (at least until/unless Joe Biden takes office), but it was enormously important for American competitiveness since the United States used to have the highest corporate tax rate in the developed world.

And the rate is still too high today, especially if you include the impact of state corporate tax rates, but at least the 2017 reform took a big step in the right direction.

And that big step is good news for jobs, wages, investment, and competitiveness.

Now for the bad news.

I could make the case that Trump’s overall spending increase is the problem.

Indeed, in a column for Reason, Matt Welch points out that Trump has not been a fiscal conservative.

The most traditional way to measure the size of government is to count how much money it spends. In Barack Obama’s last full fiscal year of 2016…, the federal government spent $3.85 trillion… In fiscal year 2020, before the coronavirus pandemic triggered a record amount of spending, the federal government was on course to cough up $4.79 trillion… So under Trump’s signature, before any true crisis hit, the annual price tag of government went up by $937 billion in less than four years—more than the $870 billion price hike Obama produced in an eight-year span… You can argue plausibly that Joe Biden and the Democratic Party will grow the government more. But the fact is, the guy railing against socialism…has grown spending faster than his predecessor and shown considerably less interest in confronting the entitlement bomb.

All of this is true, but I want to focus on specific policies, not just the overall spending performance.

Which is why I would argue that Trump’s worst fiscal policy is captured by this table from the Committee for a Responsible Federal Budget.

It shows what Trump promised compared to what he delivered and I’ve highlighted his awful record on non-defense discretionary spending (which is basically domestic spending other than entitlements). He promised $750 billion of reductions over 10 years and instead he saddled the American economy with $700 billion of additional increases.

P.S. Click here if you want background info on the different types of federal spending. But all you probably need to know is that many parts of the federal government that shouldn’t exist (Department of Education, Department of Agriculture, Department of Housing and Urban Development, Department of Transportation, etc) get much of their funding from the non-defense discretionary budget.

P.P.S. Trump has failed to address entitlements, which is reckless, but that’s a sin of omission. The increase in non-defense discretionary is a sin of commission.

P.P.P.S. I also thought about listing Trump’s failure to follow through on his proposal to get rid of taxpayer subsidies for the Paris-based Organization for Economic Cooperation and Development.

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Assuming the goal is more prosperity, lawmakers who work on tax issues should be guided by the “Holy Trinity” of good policy.

  1. Low marginal tax rates on productive activity such as work and entrepreneurship.
  2. No tax bias (i.e., extra layers of tax) that penalizes saving and investment.
  3. No complicating preferences and loopholes that encourage inefficient economic choices.

Today, with these three principles as our guide, we’re going to discuss a major problem in how dividends are taxed in the United States.

Simply stated, there’s an unfair and counterproductive double tax. All you really need to know is that if a corporation earns a profit, the corporate income tax takes a chunk of the money. But that money then gets taxed again as dividend income when distributed to shareholders (the people who own the company).

So why is this a bad thing?

From an economic perspective, the extra layer of tax means that the actual tax burden on corporate income is not 21 percent (the corporate tax rate) or 23.8 percent (how dividends are taxed on the 1040 form), but a combination of the two rates. And when you include the average additional tax imposed at the state level, the real tax rate on dividends in the United States can be as high as 47.47 percent according to the OECD.

You don’t need to be a wild-eyed supply-sider to think that incentives to build businesses and create jobs are adversely affected when the government grabs nearly half of the additional income generated by corporate investment.

Keep in mind, by the way, that workers ultimately bear most of this tax since lower levels of investment translate to lower wages.

So what’s the solution?

If we want a properly designed system for taxing businesses, we know the answer. Just get rid of the extra layer of tax.

A 2015 report from the Tax Foundation explains how various types of “corporate integration” can achieve this goal.

The United States’ tax code treats corporations and their shareholders as separate taxable entities. The result is two layers of taxation on corporate income: one at the corporate level and a second at the shareholder level. This creates a high tax burden on corporate income, increasing the cost of capital. The double taxation of corporate income reduces investment and distorts business decisions. … Many developed countries have integrated their tax systems in order to mitigate or completely eliminate the double taxation of corporate income. …There are several ways to integrate the corporate tax code. Corporate income can be fully taxed at the entity level (a corporate income tax) and then tax exempt when passed to shareholders as dividend income, or corporations could be given a deduction for dividends passed to their shareholders, who pay tax on the dividend income. Alternatively, shareholders and corporations both pay tax on their income, but shareholders can be given a credit to offset taxes the corporation already paid on their behalf.

For what it’s worth, I think it would be best to get rid of the double tax by eliminating the layer of tax that is imposed on individuals.

In other words, modify the above image in this way.

Though the economic benefit would be the same if the corporate income tax was abolished and the income was taxed one time at the individual level.

I’ll close today’s column with a bit of good news.

A few years ago, the United States had a much higher burden of double taxation because the corporate tax rate was so high. Indeed, the combined tax rate on dividends was the fourth-highest in the developed world.

Today, thanks to the 2017 tax reform, the combined tax rate is “only” the tenth-highest in the developed world.

P.S. The Estonian tax system for businesses is a good role model.

P.P.S. Under Joe Biden’s tax plan, the U.S. would have the world’s-highest combined tax rate on dividends.

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A few years ago, I put together a basic primer on corporate taxation. Everything I wrote is still relevant, but I didn’t include much discussion about international topics.

In part, that’s because those issues are even more wonky and more boring than domestic issues such as depreciation. But that doesn’t mean they’re not important – especially when they involve tax competition. Here are some comments I made in March of last year.

The reason I’m posting this video about 18 months after the presentation is that the issue is heating up.

The tax-loving bureaucrats at the International Monetary Fund have published a report whining about the fact that businesses utilize low-tax jurisdictions when making decisions on where to move money and invest money.

According to official statistics, Luxembourg, a country of 600,000 people, hosts as much foreign direct investment (FDI) as the United States and much more than China. Luxembourg’s $4 trillion in FDI comes out to $6.6 million a person. FDI of this size hardly reflects brick-and-mortar investments in the minuscule Luxembourg economy. …much of it is phantom in nature—investments that pass through empty corporate shells. These shells, also called special purpose entities, have no real business activities. Rather, they carry out holding activities, conduct intrafirm financing, or manage intangible assets—often to minimize multinationals’ global tax bill. …a few well-known tax havens host the vast majority of the world’s phantom FDI. Luxembourg and the Netherlands host nearly half. And when you add Hong Kong SAR, the British Virgin Islands, Bermuda, Singapore, the Cayman Islands, Switzerland, Ireland, and Mauritius to the list, these 10 economies host more than 85 percent of all phantom investments.

That’s a nice list of jurisdictions. My gut instinct, of course, is to say that high-tax nations should copy the pro-growth policies of places such as Bermuda, Singapore, the Cayman Islands, and Switzerland.

The IMF, however, thinks those are bad places and instead argues that harmonization would be a better approach.

…how does this handful of tax havens attract so much phantom FDI? In some cases, it is a deliberate policy strategy to lure as much foreign investment as possible by offering lucrative benefits—such as very low or zero effective corporate tax rates. …This…erodes the tax bases in other economies. The global average corporate tax rate was cut from 40 percent in 1990 to about 25 percent in 2017, indicating a race to the bottom and pointing to a need for international coordination. …the IMF put forward various alternatives for a revised international tax architecture, ranging from minimum taxes to allocation of taxing rights to destination economies. No matter which road policymakers choose, one fact remains clear: international cooperation is the key to dealing with taxation in today’s globalized economic environment.

Here’s a chart that accompanied the IMF report. The bureaucrats view this as proof of something bad

I view it as prudent and responsible corporate behavior.

At the risk of oversimplifying what’s happening in the world of international business taxation, here are four simple points.

  1. It’s better for prosperity if money stays in the private sector, so corporate tax avoidance should be applauded. Simply stated, politicians are likely to waste any funds they seize from businesses. Money in the private economy, by contrast, boosts growth.
  2. Multinational companies will naturally try to “push the envelope” and shift as much income as possible to low-tax jurisdictions. That’s sensible corporate behavior, reflecting obligation to shareholders, and should be applauded.
  3. Nations can address “profit shifting” by using rules on “transfer pricing,” so there’s no need for harmonized rules. If governments think companies are pushing too far, they can effectively disallow tax-motivated shifts of money.
  4. A terrible outcome would be a form of tax harmonization known as “global formula apportionment.” This wouldn’t be harmonizing rates, as the E.U. has always urged, but it would force companies to overstate income in high-tax nations.

Why does all this wonky stuff matter?

As I said in my presentation, we will suffer from “goldfish government” unless tax competition exiss to serve as a constraint on the tendency of politicians to over-tax and over-spend.

P.S. Sadly, America’s Treasury Secretary is sympathetic to global harmonization of business taxation.

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The crown jewel of the 2017 tax plan was the lower corporate tax rate.

I appeared on CNBC yesterday to debate that reform, squaring off against Jason Furman, who served as Chairman of Obama’s Council of Economic Advisers.

Here are a couple of observations on our discussion.

  • Jason Furman thinks it would be crazy to raise the corporate tax rate back to 35 percent. Yes, he wants to rate to be higher, but rational folks on the left know it would be very misguided to fully undo that part of the tax plan. That signifies a permanent victory.
  • Based on his comments about expensing and interest deductibility, he also seems to have a sensible view on properly and neutrally defining corporate income. These are boring and technical issues, but they have very important economic implications.
  • Critics say the lower corporate rate is responsible for big increases in red ink, but it’s noteworthy that the corporate rate was reduced by 40 percent and revenue is down by only 8.7 percent (a possible Laffer-Curve effect?). Here’s the relevant chart from the latest Monthly Budget Report from the Congressional Budget Office.

  • There’s a multi-factor recipe that determines prosperity, so it’s extremely unlikely that any specific reform will have a giant effect on growth, but even a small, sustained uptick in growth can be hugely beneficial for a nation.
  • There’s a big difference between a pro-market Democrat like Bill Clinton and some of the extreme statists currently seeking the Democratic nomination (just like there’s a big difference between Ronald Reagan and some of today’s big-government Republicans).
  • I close the discussion by explaining why “double taxation” is a profound problem with the current tax code. For all intents and purposes, we are punishing the savers and investors who generate future growth.

P.S. This wasn’t addressed in the interview, but I can’t resist pointing out that overall revenues for the current fiscal year have increased 2.2 percent, which is faster than needed to keep pace with inflation. So why has the deficit increased? Because spending has jumped by 5.8 percent. We have a spending problem in America, not a deficit problem. Fortunately, there’s a very practical solution.

P.P.S. It also wasn’t mentioned, but the other crown jewel of tax reform was the restriction on the state and local tax deduction.

+++++++++++++++++++++++++++++++++++

Welcome Instapundit readers! Thanks, Glenn

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The International Monetary Fund is one of my least favorite international bureaucracies because the political types who run the organization routinely support bad policies such as bailouts and tax increases.

But there are professional economists at the IMF who do good work.

While writing about the mess in Argentina yesterday, for instance, I cited some very sensible research from one of the IMF’s economists.

Today, I’m going to cite two other IMF scholars. Serhan Cevik and Fedor Miryugin have produced some new research looking at the relationship between firm survival and business taxation. Here’s the basic methodology of their study.

While creative destruction—through firm entry and exit—is essential for economic progress, establishing a conducive ecosystem for firm survival is also necessary for sustainable private sector development… While corporate income taxes are expected to lower firms’ capital investment and productivity by raising the user cost of capital, distorting factor prices and reducing after-tax return on investment, taxation also provides resources for public infrastructure investments and the proper functioning of government institutions, which are key to a firm’s success. …the overall impact of taxation on firm performance depends on the relative weight of these two opposing effects, which can vary with the composition and efficiency of taxation and government spending. … In this paper, we focus on how taxation affects the survival prospects of nonfinancial firms, using hazard models and a comprehensive dataset covering over 4 million nonfinancial firms from 21 countries with a total of 21.5 million firm-year observations over the period 1995–2015. …we control for a plethora of firm characteristics, such as age, size, profitability, capital intensity, leverage and total factor productivity (TFP), as well as systematic differences across sectors and countries.

By the way, I agree that there are some core public goods that help an economy flourish. That being said, things like courts and national defense can easily be financed without any income tax.

And even with a very broad definition of public goods (i.e., to include infrastructure, education, etc), it’s possible to finance government with very low tax burdens.

But I’m digressing.

Let’s focus on the study. As you can see, the authors grabbed a lot of data from various European nations.

And they specifically measured the impact of the effective marginal tax rate on firm survival.

Unsurprisingly, higher tax burdens have a negative effect.

We find that the tax burden—measured by the firm-specific EMTR—exerts an adverse effect on companies’ survival prospects. In other words, a lower level of EMTR increases the survival probability among firms in our sample. This finding is not only statistically but also economically important and remains robust when we partition the sample into country subgroups. …digging deeper into the tax sensitivity of firm survival, we uncover a nonlinear relationship between the firm-specific EMTR and the probability of corporate failure, which implies that taxation becomes a detriment to firm survival at higher levels. With regards to the impact of other firm characteristics, we obtain results that are in line with previous research and see that survival probability differs depending on firm age and size, with older and larger firms experiencing a lower risk of failure.

For those that like statistics, here are the specific results.

Here are the real-world implications.

Reforms in tax policy and revenue administration should therefore be designed to cut the costs of compliance, facilitate entrepreneurship and innovation, and encourage alternative sources of financing by particularly addressing the corporate debt bias. In this context, the EMTR holds a special key by influencing firms’ investment decisions and the probability of survival over time, especially in capital intensive sectors of the economy. Importantly, the challenge for policymakers is not simply reducing the statutory CIT rate, but to level the playing field for all firms by rationalizing differentiated tax treatments across sectors, capital asset types and sources of financing.

There are some obvious takeaways from this research.

For what it’s worth, this IMF study basically embraces the sensible principles of business taxation that you find in a flat tax.

Too bad we can’t convince the political types who run the IMF to push the policies supported by IMF economists!

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Like most taxpayer-supported international bureaucracies, the Organization for Economic Cooperation and Development (OECD) has a statist orientation.

The Paris-based OECD is particularly bad on fiscal policy and it is infamous for its efforts to prop up Europe’s welfare states by hindering tax competition.

It even has a relatively new “BEPS” project that is explicitly designed so that politicians can grab more money from corporations.

So it’s safe to say that the OECD is not a hotbed of libertarian thought on tax policy, much less a supporter of pro-growth business taxation.

Which makes it all the more significant that it just announced that supporters of free markets are correct about the Laffer Curve and corporate tax rates.

The OECD doesn’t openly acknowledge that this is the case, of course, but let’s look at key passages from a Tuesday press release.

Taxes paid by companies remain a key source of government revenues, especially in developing countries, despite the worldwide trend of falling corporate tax rates over the past two decades… In 2016, corporate tax revenues accounted for 13.3% of total tax revenues on average across the 88 jurisdictions for which data is available. This figure has increased from 12% in 2000. …OECD analysis shows that a clear trend of falling statutory corporate tax rates – the headline rate faced by companies – over the last two decades. The database shows that the average combined (central and sub-central government) statutory tax rate fell from 28.6% in 2000 to 21.4% in 2018.

So tax rates have dramatically fallen but tax revenue has actually increased. I guess many of the self-styled experts are wrong on the Laffer Curve.

By the way, whoever edits the press releases for the OECD might want to consider changing “despite” to “because of” (writers at the Washington Post, WTNH, Irish-based Independent, and Wall Street Journal need similar lessons in causality).

Let’s take a more detailed look at the data. Here’s a chart from the OECD showing how corporate rates have dropped just since 2000. Pay special attention to the orange line, which shows the rate for developed nations.

I applaud this big drop in tax rates. It’s been good for the world economy and good for workers.

And the chart only tells part of the story. The average corporate rate for OECD nations was 48 percent back in 1980.

In other words, tax rates have fallen by 50 percent in the developed world.

Yet if you look at this chart, which I prepared using the OECD’s own data, it shows that revenues actually have a slight upward trend.

I’ll close with a caveat. The Laffer Curve is very important when looking at corporate taxation, but that doesn’t mean it has an equally powerful impact when looking at other taxes.

It all depends on how sensitive various taxpayers are to changes in tax rates.

Business taxes have a big effect because companies can easily choose where to invest and how much to invest.

The Laffer Curve also is very important when looking at proposals (such as the nutty idea from Alexandria Ocasio-Cortez) to increase tax rates on the rich. That’s because upper-income taxpayers have a lot of control over the timing, level, and composition of business and investment income.

But changes in tax rates on middle-income earners are less likely to have a big effect because most of us get a huge chunk of our compensation from wages and salaries. Similarly, changes in sales taxes and value-added taxes are unlikely to have big effects.

Increasing those taxes is still a bad idea, of course. I’m simply making the point that not all tax increases are equally destructive (and not all tax cuts generate equal amounts of additional growth).

P.S. The International Monetary Fund also accidentally provided evidence about corporate taxes and the Laffer Curve. And there was also a little-noticed OECD study last year making the same point.

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There were several good features of the 2017 tax bill, including limitations on the state and local tax deduction.

But the 21 percent corporate tax rate was the unquestioned crown jewel of the Tax Cut and Jobs Act. The U.S. system had become extremely anti-competitive thanks to a 35 percent rate that was far above the world average, so reform was desperately needed.

That’s the good news.

The bad news is that Democrats in the House of Representatives already are pushing for a big increase in the corporate rate.

Rep. John Yarmuth, the new House Budget chairman, said his chamber’s budget blueprint will aim to claw back lost revenue by boosting the corporate tax rate from its current 21 percent to as high as 28 percent… he anticipates the budget resolution will envision changes to the 2017 GOP tax overhaul, including raising the corporate tax rate above its current 21 percent. “…We’ll see how much revenue we can get out of it.” The rate was 35 percent before it was cut in the GOP tax bill.

Since Republicans control the Senate and Trump is in the White House, there’s probably no short-term risk of a higher corporate tax rate.

But such an initiative could be a major threat after the 2020 election, so let’s augment our collection of evidence showing why a higher rate would be a very bad idea.

We’ll start with some analysis from the number crunchers at the Tax Foundation.

A corporate tax rate that is more in line with our competitors reduces the incentives for firms to realize their profits in lower-tax jurisdictions and encourages companies to invest in the United States. Raising the corporate income tax rate would dismantle the most significant pro-growth provision in the Tax Cuts and Jobs Act, and carry significant economic consequences. …Raising the corporate income tax rate would reduce economic growth, and lead to a smaller capital stock, lower wage growth, and reduced employment. …Raising the rate to 25 percent would reduce GDP by more than $220 billion and result in 175,700 fewer jobs.

Here’s the table showing the negative effect of a 22 percent rate and a 25 percent rate, so a bit of extrapolation will give you an idea of how the economy will suffer with a 28 percent rate.

By the way, since the adverse impact on wages is one of the main reasons to be against a higher corporate tax rate, I’ll also share this helpful flowchart from the article.

Now let’s look at some research from China, which underscores the importance of low rates if we want more innovation.

Here’s the unique set of data that created an opportunity for the research.

In November 2001, China implemented a tax collection reform on all manufacturing firms established on or after January 2002, which switched the collection of corporate income taxes from the local tax bureau to the state tax bureau. After the reform, similar firms established before or after 2002 could pay very different effective tax rates because of the differences in the management and incentives of those two types of tax bureaus…, resulting in a reduction of effective corporate income tax rates by almost 10% among newly established firms. …the policy change created exogenous variations in the effective tax rate among similar firms established before versus after 2002. We can thus apply a regression discontinuity design (RD) and use the generated variation in the effective tax rate to identify the impact of taxes on firm innovation.

And here are the findings.

Our analysis yields several interesting results. First, we show a strong and robust causal relationship between tax rate and firm innovation. Decreasing the effective tax rate by one standard deviation (0.01) increases the average number of patent application by a significant 5.7% (see Figure 2 for the graphical evidence). The reform also stimulated R&D expenditures and increased the skilled-labour ratio by 14%. Second, a lower tax rate also improves the quality of patents. The impact of tax reform on patent applications mainly comes from its effect on invention and utility patents – decreasing the effective tax rate by one standard deviation improves the probability of having an invention patent application by 4.4% and increases the number of utility patent applications by 4.7%.

Don’t forget that high personal tax rates also discourage innovation, so it’s a pick-your-poison menu.

Here’s a chart from the study, showing the difference in patents between higher-taxed firms and lower-taxed firms.

Last but not least, let’s review some of the findings from a study published by the National Bureau of Economic Research.

We present new data on effective corporate income tax rates in 85 countries in 2004. …In a cross-section of countries, our estimates of the effective corporate tax rate have a large adverse impact on aggregate investment, FDI, and entrepreneurial activity. For example, a 10 percent increase in the effective corporate tax rate reduces aggregate investment to GDP ratio by 2 percentage points. Corporate tax rates are also negatively correlated with growth, and positively correlated with the size of the informal economy. The results are robust to the inclusion of controls for other tax rates, quality of tax administration, security of property rights, level of economic development, regulation, inflation, and openness to trade

And here’s one of the many charts and tables in the study.

The bottom line is that a higher corporate tax rate will be bad for workers for the simple reason that less investment means lower productivity and lower productivity means lower wages.

P.S. It’s also likely that House Democrats will try to increase the top personal tax rate, though hopefully they’re not so crazy as to push for Ocasio-Cortez’s 70 percent rate.

P.P.S. it’s quite possible that an increase in the corporate tax rate would reduce revenues, especially in the long run.

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There are three reasons why the right kind of tax reform can help the economy grow faster.

  1. Lower tax rates give people more incentive to earn income.
  2. Less double taxation boosts incentives to save and invest.
  3. Fewer loopholes improves incentives for economic efficiency.

Let’s focus on the third item. I don’t like special preferences in the tax code because it’s bad for growth when the tax code lures people into misallocating their labor and capital. Ethanol, for instance, shows how irrational decisions are subsidized by the IRS.

Moreover, I’d rather have smart and capable people in the private sector focusing how to create wealth instead of spending their time figuring out how to manipulate the internal revenue code.

That’s why, in my semi-dream world, I’d like to see a flat tax.* Not only would there be a low rate and no double taxation, but there also would be no distortions.

But in the real world, I’m happy to make partial progress.

That’s why I was happy that last year’s tax bill produced a $10,000 cap for the state and local tax deduction and reduced the value of other write-offs by increasing the standard deduction. Yes, I’d like to wipe out the deductions for home mortgage interest, charitable giving, and state and local taxes, but a limit is better than nothing.

And I’m also happy that lower tax rates are an indirect way of reducing the value of loopholes and other preferences.

To understand the indirect benefits of low tax rates, consider this new report from the Washington Post. Unsurprisingly, we’re discovering that a less onerous death tax means less demand for clever tax lawyers.

A single aging rich person would often hire more than a dozen people — accountants, estate administrators, insurance agents, bank attorneys, financial planners, stockbrokers — to make sure they paid as little as possible in taxes when they died. But David W. Klasing, an estate tax attorney in Orange County, Calif., said he’s seen a sharp drop in these kinds of cases. The steady erosion of the federal estate tax, shrunk again by the Republican tax law last fall, has dramatically reduced the number of Americans who have to worry about the estate tax — as well as work for those who get paid to worry about it for them, Klasing said. In 2002, about 100,000 Americans filed estate tax returns to the Internal Revenue Service, according to the IRS. In 2018, only 5,000 taxpayers are expected to file these returns… “You had almost every single tax professional trying to grab as much of that pot as they could,” Klasing said. “Now almost everybody has had to find other work.”

Needless to say, I’m delighted that these people are having to “find other work.”

By the way, I’m not against these people. They were working to protect families from an odious form of double taxation, which was a noble endeavor.

I’m simply stating that I’m glad there’s less need for their services.

Charles “Skip” Fox, president of the American College of Trust and Estate Counsel, said he frequently hears of lawyers shifting their focus away from navigating the estate tax, and adds that there has been a downturn in the number of young attorneys going into the estate tax field. Jennifer Bird-Pollan, who teaches the estate tax to law students at the University of Kentucky, said that nearly a decade ago her classes were packed with dozens of students. Now, only a handful of students every so often may be interested in the subject or pursuing it as a career. “There’s about as much interest in [the class] law and literature,” Pollan said. “The very, very wealthy are still hiring estate tax lawyers, but basically people are no longer paying $1,000 an hour for advice about this stuff. They don’t need it.”

Though I am glad one lawyer is losing business.

Stacey Schlitz, a tax attorney in Nashville, said when she got out of law school about a decade ago roughly 80 percent of her clients were seeking help with their estate taxes. Now, less than 1 percent are, she said, adding that Tennessee’s state inheritance tax was eliminated by 2016. “It is disappointing that this area of my business dried up so that such a small segment of society could get even richer,” Schlitz said in an email.

I hope every rich person in Nashville sees this story and steers clear of Ms. Schlitz, who apparently wants her clients to be victimized by government.

Now let’s shift to the business side of the tax code and consider another example showing why lower tax rates produce more sensible behavior.

Now that the corporate tax rate has been reduced, American companies no longer have as much desire to invest in Ireland.

US investment in Ireland declined by €45bn ($51bn) in 2017, in another sign that sweeping tax reforms introduced by US president Donald Trump have impacted the decisions of American multinational companies. …Economists have been warning that…Trump’s overhaul of the US tax code, which aimed to reduce the use of foreign low-tax jurisdictions by US companies, would dent inward investment in Ireland. …In November 2017, Trump went so far as to single out Ireland, saying it was one of several countries that corporations used to offshore profits. “For too long our tax code has incentivised companies to leave our country in search of lower tax rates. It happens—many, many companies. They’re going to Ireland. They’re going all over,” he said.

Incidentally, I’m a qualified fan of Ireland’s low corporate rate. Indeed, I hope Irish lawmakers lower the rate in response to the change in American law.

And I’d like to see the US rate fall even further since it’s still too high compared to other nations.

Heck, it would be wonderful to see tax competition produce a virtuous cycle of rate reductions all over the world.

But that’s a topic I’ve addressed before.

Today’s lesson is simply that lower tax rates reduce incentives to engage in tax planning. I’ll close with simple thought experiment showing the difference between a punitive tax system and reasonable tax system.

  • 60 percent tax rate – If you do nothing, you only get to keep 40 cents of every additional dollar you earn. But if you find some sort of deduction, exemption, or exclusion, you increase your take-home pay by an additional 60 cents. That’s a good deal even if the tax preference loses 30 cents of economic value.
  • 20 percent tax rate – If you do nothing, you get to keep 80 cents of every dollar you earn. With that reasonable rate, you may not even care about seeking out deductions, exemptions, and exclusions. And if you do look for a tax preference, you certainly won’t pick one where you lose anything close to 20 cents of economic value.

The bottom line is that lower tax rates are a “two-fer.” They directly help economic growth by increasing incentives to earn income and they indirectly help economic growth by reducing incentives to engage in inefficient tax planning.

*My semi-dream world is a flat tax. My dream world is when the federal government is so small (as America’s Founders envisioned) that there’s no need for any broad-based tax.

P.S. It’s not the focus of today’s column, but since I talked about loopholes, it’s worth pointing out that they should be properly defined. Sadly, that simple task is too challenging for the Joint Committee on Taxation, the Government Accountability Office, and the Congressional Budget Office (or even the Republican party).

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As illustrated by this video tutorial, I’m a big advocate of the Laffer Curve.

I very much want to help policy makers understand (especially at the Joint Committee on Taxation) that there’s not a linear relationship between tax rates and tax revenue. In other words, you don’t double tax revenue by doubling tax rates.

Having worked on this issue for decades, I can state with great confidence that there are two groups that make my job difficult.

  • The folks who don’t like pro-growth tax policy and thus claim that changes in tax policy have no impact on the economy.
  • The folks who do like pro-growth tax policy and thus claim that every tax cut will “pay for itself” because of faster growth.

Which was my message in this clip from a recent interview.

For all intents and purposes, I’m Goldilocks in the debate over the Laffer Curve. Except instead of stating that the porridge is too hot or too cold, my message is that it is that changes in tax policy generally lead to more taxable income, but the growth in income is usually not enough to offset the impact of lower tax rates.

In other words, some revenue feedback but not 100 percent revenue feedback.

Yes, some tax cuts do pay for themselves. But they tend to be tax cuts on people (such as investors and entrepreneurs) who have a lot of control over the timing, level, and composition of their income.

And, as I said in the interview, I think the lower corporate tax rate will have substantial supply-side effects (see here and here for evidence). This is because a business can make big changes in response to a new tax law, whereas people like you and me don’t have the same flexibility.

But I don’t want this column to be nothing but theory, so here’s a news report from Estonia on the Laffer Curve in action.

After Estonia raised its alcohol excise tax rates considerably in 2017, Estonian daily Postimees has estimated that the target of the money the alcohol excise tax would bring into state coffers could have been missed by at least EUR 40 million. …Initially, in the state budget of 2017, the ministry had been planned that proceeds from the alcohol excise tax would bring EUR 276.4 million, but last summer, it cut the forecast to EUR 237.5 million.

I guess I’ll make this story Part VII in my collection of examples designed to educate my friends on the left (here’s Part I, Part II, Part III, Part IV, Part V, and Part VI).

But there’s a much more important point I want to make.

The fact that most tax increases produce more revenue is definitely not an argument in favor of higher tax rates.

That argument is wrong in part because government already is far too large. But it’s also wrong because we should consider the health and vitality of the private sector. Here’s some of what I wrote about some academic research in 2012.

…this study implies that the government would reduce private-sector taxable income by about $20 for every $1 of new tax revenue. Does that seem like good public policy? Ask yourself what sort of politicians are willing to destroy so much private sector output to get their greedy paws on a bit more revenue. What about capital taxation? According to the second chart, the government could increase the tax rate from about 40 percent to 70 percent before getting to the revenue-maximizing point. But that 75 percent increase in the tax rate wouldn’t generate much tax revenue, not even a 10 percent increase. So the question then becomes whether it’s good public policy to destroy a large amount of private output in exchange for a small increase in tax revenue. Once again, the loss of taxable income to the private sector would dwarf the new revenue for the political class.

The bottom line is that I don’t think it’s a good trade to reduce the private sector by any amount simply to generate more money for politicians.

P.S. I’m also Goldilocks when considering the Rahn Curve.

P.P.S. For what it’s worth, Paul Krugman (sort of) agrees with me about the Laffer Curve.

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Last month, I revealed that even Paul Krugman agreed with the core principle of the Laffer Curve.

Today, we have another unlikely ally. Regular readers know that I’m not a big fan of the Organization for Economic Cooperation and Development. The Paris-based international bureaucracy routinely urges higher tax burdens, both in the United States and elsewhere in the world.

But the professional economists who work for the OECD are much better than the political appointees who push a statist agenda.

So when I saw that three of them (Oguzhan Akgun, David Bartolini, and Boris Cournède) produced a study estimating the relationship between tax rates and tax revenues, I was very curious to see the results.

They start by openly acknowledging that high tax rates can backfire.

This paper investigates the capacity of governments to raise revenue by assessing the ways in which tax receipts respond to rates… Revenue returns from tax increases can be expected to decrease with the level of tax rates, because higher rates exacerbate disincentives to produce and raise incentives to avoid taxation. These two main channels can therefore imply that tax receipts rise less than proportionately with rates and may peak at a given point.

Given the OECD’s love affair with higher tax burdens, this is a remarkable admission about an important limit on the ability of governments to grab revenue.

Their estimate of the actual revenue-maximizing burden is almost secondary. But nonetheless still noteworthy.

According to the estimated coefficients in model 5 of Table 3, an EMTR of 25% maximises CIT revenue.

Not that different from the estimates produced at the Tax Foundation and American Enterprise Institute.

Here’s a chart showing the revenue-maximizing level of tax, which varies depending on the degree to which a country has close economic ties with the rest of the world.

Interestingly, the study openly admits that tax competition plays a big role.

Trade openness is found to reduce CIT revenue. The latter is consistent with…international tax competition, which is likely to increase the effects of tax rates on the location of firms or more broadly of their profit-generating activities.

Sadly, the political types at the OECD have a “BEPS” scheme that is designed to curtail tax competition.

Which is a very good argument for why tax competition should be allowed to flourish.

But let’s not digress. Here’s another remarkable admission in the study. The OECD economists point out that it is not a good idea for governments to try to maximize revenue.

Estimates of revenue-maximising rates should not be seen as policy objectives or recommendations, as they imply high levels of economic distortions or tax avoidance.

Amen. I cited a study in 2012 showing that a revenue-maximizing tax rate might destroy as much as $20 of private sector output for every $1 collected by government. Only Bernie Sanders would think that’s a good deal.

Last but not least, the study even points out a class-warfare approach is misguided when looking at personal income taxes.

More progressive broadly defined personal income taxes generally yield more revenue, but very strong progressivity is associated with lower revenue.

Another wise observation.

The bottom line is that high tax rates of any kind are not a good idea.

P.S. The International Monetary Fund inadvertently provided very strong evidence about the Laffer Curve and corporate taxes.

P.P.S. An occasional good study doesn’t change my belief that the OECD no longer should be subsidized by American taxpayers.

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