Effective Corporate Tax Rates in US

[JamesVincent]

Still, the tax issue looms large, in part because Burger King has a lot of company. According to the Miami Herald, at least 21 U.S. corporations have announced or completed tax inversion deals since 2012 — “almost half the total of 51 such transactions in the past three decades.” These deals allow them to pay lower corporate taxes by relocating their headquarters to more favourable jurisdictions, such as Canada. The American corporate tax rate sits at 40%, while Canada’s is 26%. But moving to Canada won’t necessarily yield dramatic savings for Burger King: Last year, the company paid an effective U.S. tax rate of 27.5%, due to the fact that it already operates in multiple jurisdictions.

Your marginal tax rate is lower then our effective tax rate and people wonder why companies want to leave. And why articles claiming the reverse are..... questionable.

[Burnaby49]

Still, the tax issue looms large, in part because Burger King has a lot of company. According to the Miami Herald, at least 21 U.S. corporations have announced or completed tax inversion deals since 2012 — “almost half the total of 51 such transactions in the past three decades.” These deals allow them to pay lower corporate taxes by relocating their headquarters to more favourable jurisdictions, such as Canada. The American corporate tax rate sits at 40%, while Canada’s is 26%. But moving to Canada won’t necessarily yield dramatic savings for Burger King: Last year, the company paid an effective U.S. tax rate of 27.5%, due to the fact that it already operates in multiple jurisdictions.

Your marginal tax rate is lower then our effective tax rate and people wonder why companies want to leave. And why articles claiming the reverse are..... questionable.

At one time we also had a very high corporate tax rate until the government realized the higher it went the less tax was collected. The government can hit individuals like myself with high rates because we are sitting ducks but corporations have the flexibility to move, as you Americans are finding out with your tax inversion ploy.

[Duke2Earl]

Most people of all political persuasions here in the US publicly agree that corporate taxes have to be reformed and the basic proposition is that marginal rates would be lowered in return for simplification and loophole closings. I believe the majority of political thought would basically favor this to be revenue neutral. Despite the seeming agreement of both parties on goals this is not happening and is unlikely to happen soon. The reasons for this cannot be discussed here but suffice it to say that the politics of this issue are very strong.

[.]

I'll revive this thread by pointing out something that had thusfar been totally neglected.

Corporations don't pay taxes, people do. (That can be expanded to "businesses" in general. regardless of form -- corp, partnership, sole prop.)

Corporations are just collectors of revenue, taxes are just another cost of doing business and all taxes -- like every other cost -- are passed on to someone else or the corporation won't survive for very long.

To corporations, there are three kinds of people -- employees, customers and shareholders -- on whom taxes can be hung. Market competition prevents arbitrary raising of prices to customers and investors will abandon outfits/industries that provide sub-standard returns for the risk taken.

Which leaves employees. Turns out that (depending on which study you want to believe, and there have been many) somewhere between 70 and 90% of corporate taxes come out of the hide of the corporation's employees in the form of lower wages and benefits than would otherwise be the case.

Of course, government absolutely loves the taxation of business profits because it's a totally opaque and hidden tax on the people who actually pay the taxes and that fact can obfuscated 'till the cows come home. And has been, from day one. People can rant and rave about "evil corporations" and feel self-satisfied about even though they have no idea who is actually paying those taxes. Even those who understand that corporations don't pay taxes can't say with total certainty who does.

The correct rate of corporate taxation is zero -- let's make it clear who is really paying those taxes by taxing the actual people who would receive the income.

If that happened tomorrow, there would be a massive switch by business organizations to the C-corp form (away from sub-S, partnerships and sole props,) the opposite of what happened in the past when the top individual rate went below the top corporate rate. Probably a good thing -- a formal, legal separation between personal and business -- something too many sole props have been known to play games with.

If corporate income tax rates were zero, one could then make an iron-clad case for taxing dividends as ordinary income. And maybe a half-a-case for some some sort of accumulated earnings tax.

Cap gains taxes should also be zero, considering that we need to encourage investment, the only thing that increases productivity, which is the only thing that leads to a higher standard of living.

Personally, I'd prefer to eliminate all income taxes and substitute consumption taxes, but that's another topic entirely.

[operabuff]

Which leaves employees. Turns out that (depending on which study you want to believe, and there have been many) somewhere between 70 and 90% of corporate taxes come out of the hide of the corporation's employees in the form of lower wages and benefits than would otherwise be the case.

It's nice that you believe this, but it ain't necessarily so. What I read suggests that it's a tricky problem to determine the incidence of the corporate tax.

See, for example:

http://www.cbo.gov/sites/default/files/ ... idence.pdf

http://www.urban.org/uploadedpdf/100134 ... idence.pdf

The latter study suggests that even if the tax falls in a great proportion on labor, it remains progressive, i.e., the higher income employees bear the largest share of the cost.

IMHO, your argument is just a variant on the trickle down theory - reduce taxes on the rich and somehow the benefits will flow to the poor. I don't doubt that corporate taxes need reformation (so do individual taxes) but I don't think they should be zero.

[Duke2Earl]

The questionable economic argument for elimination corporate taxes seems to emerge repeatedly. The problem is that the pedantic argument totally ignores actual reality. Making corporate profits tax free would only exacerbate the serious problem we have today of making corporations ever richer and depositories of huge piles of cash to buy governments and consolidate power and have the added effect of creating the biggest tax shelter in history. The only way it would make any sense whatsoever to eliminate corporate taxation would be if corporations were required to distribute their profits to shareholders on a current basis (where the profits could be taxed.) If you added that wrinkle, you would find the corporations firmly opposed to repealing the corporate tax (which is far easier to avoid....look at Apple and actual effective tax rates on 10-K's.)

Yes, reform and simplification is well worthwhile. But elimination is another of those ideas that sounds good on paper and would be disaster in reality.

[JamesVincent]

I doubt most people who call for a change in corporate taxes really believe in a 0% tax. I could be wrong, it happens on occasion, but I doubt it. We will always have taxes of some type, no getting around it.

However, I think the best thing that could be done to corporate taxes is a flat tax, say 15% for everyone, period. The problem with the way they're set up now is the same with individual taxes, the more money you have, the more loopholes you can exploit to lower your taxes. So a small business would be stuck with a large tax a large corporation can manipulate theirs and get a smaller tax bill. 15% would bring us more in line with the rest of the world and still provide a significant amount of income, perhaps more then before since some companies were paying less.

Coupled with that we need a provision that if you do business in the US, you pay US taxes. None of this having "headquarters" in Ireland or Mexico to get around paying your taxes. If you make money here, you pay money here. At the same time drop the damn repatriation tax. That has to be one of the stupidest things I have ever seen in the tax code. You make money overseas and have to pay out 35% of it to bring it home. And then people complain about businesses not bringing their money back to the US. I wouldn't either.

[.]

Well, James, it's good to see that you agree with me that most of the corporate income tax falls on employees. It certainly does, no other bunch of actual people (customers or shareholders) bear much of it for the obvious reason that it's not simply not possible in the long-run.

We don't know the exact percentage, but why hide even one dime of these taxes under the bogus "corporate income tax" rubric?

It's a hidden tax, the public doesn't understand (and never has) that it is THEM paying, say 80% (if not more) of it. The public, when asked if it's a good idea to tax corporations more will say, every time, "Oh, yes, that's a great idea." Because they don't know they're actually paying. And, of course, everyone always thinks it's a good idea to tax the other guy.

And why shouldn't they? They're being told that "evil corporations" will pay. Which is nonsense on stilts.

As for "trickle-down," my argument on corporate tax rates has absolutely nothing to do with that, it stands on its own. It's a fake, hidden tax and should be zeroed out.

BTW, supply-side economics never said "reduce taxes on the rich and somehow the benefits will flow to the poor." The idea was that if incentives to work, save and invest were increased, the benefits will accrue to all segments of the economy and the public. As they did.

Lastly, corporate income taxes only amounted to about 13% of government revenue in FY14. 345 billion. Relatively minor compared to 2.2 trillion in individual taxes. More importantly, there's over 2 trillion in corporate foreign profits (already taxed by the foreign governments) that could come home, but obviously hasn't due to the current US corporate tax regime.

And would, in a flash, if we dumped the corporate income tax. Over a few years, a 2 trillion capital infusion (and probably more from foreigners) into this economy would generate so much growth (and accompanying individual tax receipts) that the loss of corporate income taxes would be an afterthought.

[Jeffrey]

Are we allowed to talk politics in this section?

[.]

Say, Duke, I did say above:

If corporate income tax rates were zero, one could then make an iron-clad case for taxing dividends as ordinary income. And maybe a half-a-case for some some sort of accumulated earnings tax.

As it stands, corporate net income is taxed AND dividends are taxed to the individual.

Either maintain a corporate income tax and cut the rate of dividend taxation to the individual to zero, or cut the corporate income tax rate to zero and tax dividends to the individual as ordinary income. You know, in a more optimal world.

I prefer the later, but I'm not holding my breath.

The accumulated earnings tax thing would be to prevent the holding of unlimited, untaxed corporate income as cash or cash-equivalents. Maybe one times annual sales. Make it punitive enough to guarantee the pay-out of any excess idle earnings as dividends. The recipient can then invest the net-after-tax in whatever he wishes, idle or otherwise.

[.]

Are we allowed to talk politics in this section?

Nope, and we're not. We're talking about the incidence of the corporate income tax and alternatives to the current scheme. Which has been around for many decades. The fault for the current crummy system lies with all politicians. They all love to hide taxes if they can. Nobody here has said anything about politics. Except you.

[Jeffrey]

I doubt most people who call for a change in corporate taxes really believe in a 0% tax. I could be wrong, it happens on occasion, but I doubt it. We will always have taxes of some type, no getting around it.

This might be a strawman but my concern would be that the same people arguing for elimination of corporate income taxes are also the ones arguing we should elimination the personal income tax and replace with with a national sales tax system.

Edit: Well, what type of tax system is better is arguably a political debate.

[.]

Actually, it's an economic debate. But, like I said above, income vs. consumption taxes are a whole different topic.

My point here is that corporate income taxes are a sham and a deception, hide who actually pays them and should be gotten rid of.

[Jeffrey]

Can't really have that conversation in a vacuum without discussing what would replace it.

[Duke2Earl]

Say, Duke, I did say above:

If corporate income tax rates were zero, one could then make an iron-clad case for taxing dividends as ordinary income. And maybe a half-a-case for some some sort of accumulated earnings tax.

As it stands, corporate net income is taxed AND dividends are taxed to the individual.

Either maintain a corporate income tax and cut the rate of dividend taxation to the individual to zero, or cut the corporate income tax rate to zero and tax dividends to the individual as ordinary income. You know, in a more optimal world.

I prefer the later, but I'm not holding my breath.

The accumulated earnings tax thing would be to prevent the holding of unlimited, untaxed corporate income as cash or cash-equivalents. Maybe one times annual sales. Make it punitive enough to guarantee the pay-out of any excess idle earnings as dividends. The recipient can then invest the net-after-tax in whatever he wishes, idle or otherwise.

In practice, the current accumulated earnings tax is simply a bad joke. It hardly ever applies to anyone in reality. To avoid it all you have to do is have an alleged plan to invest the funds at some time in the future. A punitive accumulated earnings tax with real teeth would be fought by corporations to the exclusion of your pie in the sky argument. It's nice to have economic arguments but it is necessary to modify them to fit actual reality. The corporations will not give up their cash hoards...period. And my biggest tax shelter in history argument is very, very real. All the mega rich would have to do is contribute all their business interests and cash to wholly owned corporations and just let them percolate there tax free. The bottom line argument against taxing both corporate profits and dividends comes down to "It's just not fair to tax these twice." Perhaps in a theoretically optimum system that would be true. In actual reality, it makes no difference whether they are taxed twice or not. No corporation anywhere will ever reduce prices or increase salaries because their tax burden has declined. It will just all go to additional profit (especially if that profit isn't taxed). The actual hard truth is we have the tax system we have because we want it to be that way. Nobody wants a tax system that "makes economic sense." They want a tax system they can game and dodge and has personal goodies and loopholes. No evil god came down from outer space and imposed this system on us. We got it because we wanted it. Every time we have done anything whatsoever to make the system simpler or more logical it has lasted very few years before it is worse than ever. For all the moaning about marginal rates, everyone knows in actual reality effective rates are much, much less.

[BBFlatt]

If corporations don't pay income taxes, why do they fight so hard when the IRS tries to assess them?

[Famspear]

If corporations don't pay income taxes, why do they fight so hard when the IRS tries to assess them?

A point well taken. This reminds me of the tired argument that when taxes or any other costs go up for a business, the business can simply "pass the cost along" to the consumer. If only it were that easy, right? If any business could simply pass any cost increases on to the consumer by raising prices, no business should ever have to go bankrupt. The real world does not always work that way. A corporation is not some sort of financially omnipotent entity that can recover any additional cost imposed on it. Sometimes, you just take the hit.

[JamesVincent]

Well, James, it's good to see that you agree with me that most of the corporate income tax falls on employees. It certainly does, no other bunch of actual people (customers or shareholders) bear much of it for the obvious reason that it's not simply not possible in the long-run.

Corporate taxes are ultimately paid by two groups, the consumer and the employee. The consumer pays in terms of higher or lower pricing, the employee in terms of higher or lower wages. Shareholders get theirs after those two groups have gotten their bite. However, like Fam so rightly pointed out, just because a corporation can control their own prices does not mean they can control the market's prices. Therefore they only have a limited control over where they can bring up a loss.

And my point before about competition is even more important in this type of debate. If you have a company that is harbored overseas and you have a company that is in the US the US company, at this point, cannot be truly competitive. It will have to pay the taxes of doing business here while the overseas company may very well not. And in a market driven economy that will put a great burden on the company ashore.

There has been a great debate lately over raising minimum wage to $15/ hr. While this may sound good to all the people making less then that, where would these companies that play by the rules come up with that? Only really two places, higher prices or less employees. If they raise all their employee's wages their tax bill is still going to be there and now they have less to deal with and companies are not in the business to shut themselves down. And we're not necessarily talking about large, international businesses, we're talking about the business that keep a lot of cities going and have the bulk of the employees from smaller towns.

People keep wanting to kill the companies but force them to pay more, and they have no clue what they are even getting into. We've already seen the law of unintended consequences quite clearly and we need to avoid making a bad situation worse simply by thinking it will be someone else to pay for it.

[.]

The corporations will not give up their cash hoards...period.

Huh? Nobody asked anyone to "give up" any cash "hoard."

A better question is why on Earth would any corporation repatriate their offshore earnings to the US (on which they have already paid the appropriate local foreign taxes) if they have to pay 35% minus [foreign taxes paid] to bring them to the US?

They wouldn't, they're not crazy. They can invest that money where it is, or anywhere else other than the US. They might prefer to invest it in the US, but the effect of the nasty haircut of additional US tax cost on capital costs says forget it.

The last time -- 2004 -- we let them bring already-taxed foreign earnings back with a minimal US tax cost -- 5% -- 350 billion was repatriated.

The capital influx to the US would be shocking with a US corporate tax rate of zero, should we ever be so fortunate as to see it. And it won't just be formerly-foreign US corporate cash coming here, the rest of the world will beat a path to our door.

No corporation anywhere will ever reduce prices or increase salaries because their tax burden has declined. It will just all go to additional profit (especially if that profit isn't taxed).

Really? Are you are of the opinion that no "excess" profit is ever competed away? As it always has been, for hundreds of years?

Nah, no new possible new entrants will think that they now can pay a little more to attract employees and/or sell the resulting product or service at a little lower price.

No existing company will ever think "Gee, now we can give a raise to those employees we really value and don't want to be lured away by competitors offering more money." Or, "Hey, now we can recruit some better employees." Or, "Let's grab some market share from the rest of these dinosaurs by cutting prices a bit, we've got a little room now to do so."

Nope, none of those calculations would ever be made. More than a million times a day.

Any way you slice it up, what used to pay hidden "corporate income taxes" would shortly be allocated between higher wages (the vast majority of it) and lower prices.

I figure that it would take less than a year for most of the effects to filter throughout the entire economy. People aren't stupid and we're only talking about 350 billion a year -- 2% of GDP -- to be reallocated by the market. Child's play.

The biggest benefit of the abolition of corporate income taxes would be an increase (perhaps small, or perhaps not-so-small) in the standard of living due to increased productivity due to increased investment in the US. It's like a freebie just lying there on the floor, waiting to be picked up.

Picking it up, of course, would mean more tax revenue, too. More than was lost from the loss of "corporate" income taxes.

From individuals. No longer hidden in bogus "corporate" taxation.

[Duke2Earl]

All I can say is you are welcome to your theoretical delusions about something that will never happen. All you do is repeat the same imagined results and never come to grips with anything I said. Actual reality is not theoretical. Have a nice day.