Should corporations pay tax?

[eurusdzn]

Relatively low corruption level is taxable.
Clean water, sewage, utilities, transportation infrastructure is taxable. Feds subsidize localities.
Access to the high wage, most wealthy, most debt riden, most government subsidized populace is taxable.
What a deal this must be to the largest companies that can afford to avoid paying US corp. taxes especially if labor is outside the US as well. No worries as the gobernment will subsidize that comsumer and he will likely buy that iPad and pay no taxes as well.
What percentage of gross is labor and taxes? Probably a lot.
So the income of the individual is used to fund government operations and backstop the corporations when they fail. Whata golden time to do business in the US.
It did not used to be like this. Tell me again how bad the 1970s were. Question is for who?

 

[piezoe]

That is not the case now. C-Corps pay tax on earnings, whether they reinvest it or not. They may avoid paying dividends and they may leverage a purchase back shares instead and in addition to a dividend which would reduce dividend tax paid, and of course much C-Corp stock is owned by pensions and in non taxed accounts. Making the corp tax zero makes leverage a wasteful expense and removes the inventive to leverage up to reduce tax....In case of Sub S all income is taxed whether it is distributed or not...so reinvested earnings is absolutely after tax. Zero Corporate makes the C-Corp/S-Corp distinction unnecessary, it also removes the who basis for territorial tax and offshore earnings. You would have less leveraged corps investing more profit back into the business and more active BODs demanding operating earnings and free cash to invest and pay dividends. You lower the individual rate to reasonable flat rate and you will have a boom of inbound U.S. investment and capital spending on plant and equipment, you will have to reform immigration to fill the job explosion, wages will go up.

Great ideas here, for the most part. But a flat rate on individuals will only make matters much worse for everyone. The only fair income tax, if you are going to have one, is a graduated tax, where every one pays the same rate on the same dollar earned. In a flat rate tax you pay the same rate of different dollars earned! That will accelerate the income distribution problem our economy is suffering from and will accelerate the U.S. move toward third world status.

 

[Ed Breen]

Sig, you think all C corps can and should avoid taxes by adjusting expenses on the fly so that they never make a taxable profit. You further think this ability of all C corps Obviates the need to reform the U.S. Corp Tax structure; since Corps can universally avoid it, you suggest that to change it would be too disruptive.

I suppose in your view shareholders have no interest in a distributable profit and no one cars about EPS; al corps are eternal start ups that never mature.

I think i understand what you are saying and as policy I think your proposition is ridiculous. I believe in business making money; otherwise I go play golf.

Thank you for responding but I think our discussion drilled a dry hole. My regards to your CPA.

 

[Ed Breen]

Great ideas here, for the most part. But a flat rate on individuals will only make matters much worse for everyone. The only fair income tax, if you are going to have one, is a graduated tax, where every one pays the same rate on the same dollar earned. In a flat rate tax you pay the same rate of different dollars earned! That will accelerate the income distribution problem our economy is suffering from and will accelerate the U.S. move toward third world status.

I think the issue with progressivity is deciding at what income level and rate you start and considering how that dovetails with you social safety net and then deciding at what income level and rate you stop and considering there how that dovetails with incentives to take risk, innovate and invest capital. Done properly there is no problem with progressivity. You have to decide if your purpose in tax structure is really to raise the necessary funds to operate government without distorting economic behavior or whether you want to use the tax code as social policy that distorts economic behavior in ideological directions.

One thing is clear to me and that is that the income inequality in the U.S. is caused by a thirty plus year trend of declining domestic investment that is attached to a tax policy structure and fiscal structure that discourages domestic investment and invites capital to seek higher returns elsewhere, to the detriment of labor.

 

[piezoe]

Breen, you make good sense. And I believe you can see the defects in the very appealing idea of flat tax. And I even agree with regard to your last point, in all respects except for one, and admittedly it's a very debatable point. I don't think declining internal investment, as undesirable as that is, is a main driving force behind income inequality. I currently believe that declining internal investment is a symptom rather than cause. (I am subject to changing my mind on this point.)

Have you red John Quiggin's book "Zombie Economics"? It's brilliant! https://www.google.com/search?q=john+Quiggin&ie=utf-8&oe=utf-8

 

[Ed Breen]

I have not read the book, I will try to look at it and tell you what I think, probably not right away.

On issue of income inequality, the concept of a middle class was created by the industrial revolution, which in turn was part and parcel to the historic innovation and development of democratic capitalism. Remember that before this there was feudalism, the most income inequality you can have. Under feudalism all the wealth was owned by the monarchs, clergy and their warlords, everybody else was a poor serf. Democratic capitalism and industrial development created wealth for the serf class and overthrew the monarchy which in its decline had devoured the clergy, the war lords then went to work for the merchants.

The middle class was created by capital investment and individual freedom in economic activity against the monopoly structure of the monarchy/church feudalism.

It should be no surprise as we attack investment that income inequality rises. If you don't invest innovation and assets that produce you don't have increased productivity and you don't have wage increases. In 1955 more than half of GDP was based on private investment, more than government spending and more than consumption. We were wealthier then. Today less than 12% of GDP is based on private investment. We are cannibalizing our assets and pretending that consumption and government spending does not require production and in that process we are returning to a new feudalism. Understand feudalism and socialism are very similar systems.

 

[piezoe]

I have not read the book, I will try to look at it and tell you what I think, probably not right away.

On issue of income inequality, the concept of a middle class was created by the industrial revolution, which in turn was part and parcel to the historic innovation and development of democratic capitalism. Remember that before this there was feudalism, the most income inequality you can have. Under feudalism all the wealth was owned by the monarchs, clergy and their warlords, everybody else was a poor serf. Democratic capitalism and industrial development created wealth for the serf class and overthrew the monarchy which in its decline had devoured the clergy, the war lords then went to work for the merchants.

The middle class was created by capital investment and individual freedom in economic activity against the monopoly structure of the monarchy/church feudalism.

It should be no surprise as we attack investment that income inequality rises. If you don't invest innovation and assets that produce you don't have increased productivity and you don't have wage increases. In 1955 more than half of GDP was based on private investment, more than government spending and more than consumption. We were wealthier then. Today less than 12% of GDP is based on private investment. We are cannibalizing our assets and pretending that consumption and government spending does not require production and in that process we are returning to a new feudalism. Understand feudalism and socialism are very similar systems.

Yes. I seems you may be assuming something and not realize it. What you are assuming, it seems, is that increased productivity leads to wage increases. Productivity in the U.S. has increased, but where are the wage increases? Could it be that capital is driving out labor, just as Marx said it would?

Piketty has made the point that extreme income inequality is the normal state, and what we experienced in the U.S., Post WW II until about 1980, was abnormal. Assuming he's right, I think a question we should be asking is whether the abnormal is more desirable? If it is , how best to maintain it.

 

[Ed Breen]

You are right; there is more going on with wages than productivity alone; labor supply, technology, cost of capital compared to cost of labor all matter. I have read Piketty and I find his analysis glib, fashionable and false, and his statistics faulty. He merges business income with wages, his metrics for long historic periods have no consistency. His notion of a wealth ratio does not adjust for pensions so much of what he complains of is a demographic phenomenon and inherently good.

When I think of Pinketty and his celebrity I am reminded of the play, "History Boys," which involved a group of 'public school' boys in the U.K. prepping to get into "Oxbridge." The idea of their history professor is that they needed in there application essays a profoundly radical perspective on the normal interpretation of history and that it did not matter if it were true or not, the shock and creativity of the essay would make the necessary distinction. It was quite a good play once you got by the gratuitous pedophilia.

I once spent a summer doing research at the Brookings Institute, here is what a Brooking Fellow, hardly a conservative bastion, says about Pinketty's novel and fashionable conceits:

From Brookings Papers on Economic Activity, Matthew Regnile, "Deciphering the Fall and Rise in the Net Capital Share," Brookings, March 19, 2015:

Capital income is not growing unboundedly at the expense of labor, and further accumulation of capital in fact most likely means a fall in capital’s share of total income – refuting one of the main theories of economist Thomas Piketty’s popular book Capital in the 21st Century.

 

[Ed Breen]

It is very important and very telling that Piketty misstates the case of capital by conflating housing investment with investment in real assets. Piketty is not alone in his conceit; Rogoff and Rhinehart create an epic conceit in their book, pointedly less to the left than Picketty and Saez, "This Time It is Different," in that they misleadingly combine two vastly different issues when they conflate public sovereign debt with domestic private debt. I offer this to show you that I do not only pick on the left.

The important thing about Piketty's conceit is that housing is not properly understood as a real asset for investment. I am sure Piketty does not get this. A real asset is something that has a legally cognizable claim on an after tax future income stream. By that analysis, housing is essentially more of a durable good than a real asset. Only the part of the value of a house that is based on its rental value can be considered the real asset value. This may seem tedious and obscure but the failure to understand this is the essence of the financial collapse of 2009.

So, I am still saying that only the investment in real assets, the maintenance and creation of real assets, the increase in the aggregate of real assets, can define wealth...more assets with higher future income stream expectations and you are wealthier, less and you are poorer. Only investment maintains and increases these assets, only investment of surplus production can accomplish this wealth building, no wealth building no wage increases.

 

[piezoe]

Thank you, Breen. You have given me much to ponder. I want to find the Matthew Regnile paper you refer to. I will look for it. In the meantime should you be able to point me directly to it, it would be much appreciated. Comments re real assets are duly noted.