Study: To Help US Workers Find Jobs, Eliminate or Slash Corporate Income Tax
by Barbara Hollingsworth
April 15, 2014
Source: CNS News
Eliminating or greatly reducing America’s corporate income tax “produces rapid and dramatic increases” in “U.S. investment, output, and real wages,” creating jobs for American workers and boosting the nation’s Gross Domestic Product (GDP) a full 6 percent, according to a new study released Tuesday on Capitol Hill.
“The tax is mostly about driving companies out of the United States,” Dr. Laurence Kotlikoff, an economist at Boston University and one of the study’s four co-authors, told CNSNews.com.
“The burden of the corporate income tax falls mainly on workers,” he pointed out, “and they are the ones who will gain most from reform.
“When you turn off the corporate tax and raise personal taxes, surprisingly good things happen,” explained Kotlikoff, director of the new Tax Analysis Center. “A lot of companies abroad would start operating in the U.S., and U.S. companies that are investing abroad would start investing here.”
At 35 percent, the U.S. currently has the highest marginal corporate tax rate among developed countries. On March 31st, Moody’s Investor Services reported that in 2013, non-financial U.S.-based businesses held $947 billion in cash overseas, up 12 percent from 2012.
“The high amount reflects the negative tax consequences of permanently repatriating money to the U.S. and the domestic use of cash for dividends, share buybacks and the majority of acquisitions,” said Moody’s vice president Richard Lane.
The study used a state-of-the-art, life-cycle computer model to track capital flow simulated by tax reform in the U.S. while assuming no changes in tax rates in Europe, Japan, China and India. It found that eliminating the corporate income tax would return a large amount of capital to the U.S., where it would be put to use creating jobs and expanding productivity.
.“Of central issue is the effect of eliminating the U.S. corporate income tax in its entirety while using either wage or consumption taxation to make up lost revenue. According to our model, this policy produces major economic benefits and welfare gains in the U.S.,” according to the study, entitled “Simulating the Elimination of the U.S. Corporate Income Tax,” sponsored by the National Center for Policy Analysis (NCPA).
Those benefits include “a rapid and sustained 23 to 37 percent higher capital stock, depending on the year in question, with most of the added investment reflecting capital inflows in response to the U.S.’ highly favorable corporate tax climate," according to the study. (See CorporateTaxPaper2014.pdf)
“The way I like to think of it is repositioning the corporate income tax, not eliminating it,” Kotlikoff said, acknowledging that many people may view the study’s recommendations as letting big corporations off the hook by not making them pay their “fair share”.
However, as he pointed out in a January oped in the New York Times, the study actually makes “a very strong, worker-based case for corporate tax reform.”
“There’s a big problem with the public’s understanding of who actually pays and doesn’t pay” the corporate income tax, Kotlikoff told CNSNews.com. “Corporations are not people. Their owners are people, and the tax breaks are going to them.”
Since “higher capital per worker means higher labor productivity,” the real wages of unskilled laborers in the U.S. would permanently increase by 12 percent, and skilled workers would receive 13 percent larger paychecks as a result.
Although “all cohorts benefit,” Americans born after 2000 would get “a huge 7 to 9 percent welfare gain depending on their skill group and their year of birth!” according to the study, which was co-authored by Hans Fehr and Sabine Jokisch of the University of Wuerzburg, and Ashwin Kambhampati, an economics major at Oberlin College.
Kotlikoff explained that under the study’s recommendations, the personal income tax for people making less than $100,000 per year would be zero. Any income above that amount, including corporate dividends, would be taxed at 25 percent “to maintain revenue neutrality.”
“If shareholders want to pay somebody $20 million to run the company, let them,” he added. “It won’t be coming out of Joe Steelworker’s pockets.”
The study assumes that most tax breaks and loopholes would also be eliminated, except for certain progressive features such as the earned income and child tax credits. “The income tax is the biggest welfare program in the country,” Kotlikoff pointed out. “I think most people would view that as a fair deal.”
“This is a win-win for all generations” in the U.S., he added. “Nobody gets hurt except foreign workers” who are currently benefiting by the tax-avoidance strategy of many U.S. corporations.
“A lot of people on the left and right call themselves economists, but they’re really politicians,” Kotlikoff told CNSNews.com. “This is basic economics. Even Democrats in Seattle understand that if Boeing goes to North or South Carolina [to lower costs], they’re screwed. They understand this at the local level, but not at the national or global level.”
But there is an even more urgent reason why corporate taxes, which generate just 1.8 percent of the nation’s GDP, should be eliminated, he says. Attracting capital back to the U.S. may be the only way to save the country from financial collapse.
Using the Congressional Budget Office’s own Alternative Fiscal Scenario figures, Kotlikoff calculated that the federal government’s true indebtedness - when all of its off-book obligations, including Social Security, Medicare and other entitlement programs are considered - is nearly 12 times larger the $17.5 trillion total public debt outstanding cited by the U.S. Treasury Department.
“Independent of what you call things, the nation’s true fiscal gap is $205 trillion” Kotlikoff told CNSNews.com. “The nation is completely broke. We’re in terrible fiscal shape.”
Absent major reform, “I don’t think we have a good end-game except to print more money, which we’ve done at an incredible pace for the past six years. But the world may decide they don’t want to keep taking money the government just printed that afternoon in return for real goods and services. It’s a game you can only play for a while,” he said.
“Unless we get this problem under control in a serious way, we will have a financial and fiscal disaster,” Kotlikoff predicted, adding that former OMB director David Stockman was “right on target” when he recently wrote that the “global financial system is land-mined with time-bombs” and “the mother of all financial bubbles is beginning to crack.”
“You can’t continue to print this much money and basically quadruple the money supply in seven years. We have set up the conditions for hyperinflation in our country,” Kotlikoff said. “It didn’t work for the Roman Empire at its height, and it is not working for the U.S. empire.”
However, despite the nation’s dire fiscal straights and partisan standoff, Kotlikoff says he remains optimistic.
“We can do this,” he told CNSNews.com. “Both parties can get what they want, which is to help our kids get jobs, and God knows we need them these days.
“We can find our way back. But if we keep misstating our true fiscal condition, stealing from our kids, and printing money to pay our bills, and if our politicians are too concerned with getting reelected to speak the truth, nothing can save this country.”