Why Corporations Shouldn’t Pay Taxes – Zero, Zilch, Nada
It's time to stop feigning surprise and outrage when corporations relocate abroad. They're just logically and legally fleeing an aggressively confiscatory tax code.
by James Pethokoukis
August 04, 2014
Source: The Week
"It ain't right," says President Barack Obama. American companies who dodge the taxman by merging with overseas rivals are "renouncing their U.S. citizenship" and should be branded "corporate deserters," he says. And in name of "economic patriotism," Obama wants Congress to quickly close the corporate "inversion" loophole so these Benedict Arnold multinationals keep paying their fair share to Uncle Sam.
But patriotism, at least of the superficial sort, and business don't mix. For example, after the 9/11 terror attacks, investors wondered if there would be a "patriots rally" once the New York Stock Exchange reopened. Well, there wasn't. Instead, the Dow Jones Industrial Average fell by more than 7 percent on Sept. 18, 2001, one of largest one-day declines in Wall Street history. With fear of new attacks running high, there was little incentive for investors to stay in the market — even though it would have been the "patriotic" thing to do.
Corporations are not required to have America's best interests at heart. This is business. And for many U.S. multinationals, there is little incentive to stay officially based in America and remain subject to a complex, confiscatory tax code. It's not just that the U.S. has the highest statutory corporate tax rate — it's 40 percent including federal and state levies —among advanced economies. Even once myriad tax breaks are factored in, the effective U.S. corporate tax rate is still tops. There's no mystery as to why companies are going through all this trouble to escape the Treasury Department. It has nothing to do with a lack of patriotism, or the evasion of some sort of national duty, and everything to do with reducing costs and maximizing profits. That's what businesses do — at least the ones that want to stay in business.
And let's remember who benefits when businesses reduce their tax burden — perfectly legally! — by moving overseas. Mitt Romney was bang on when he said "corporations are people." Workers bear 70 percent of the corporate tax burden, according to the Congressional Budget Office. American Enterprise Institute economists Kevin Hassett and Aparna Mathur have found higher corporate taxes lead to lower wages, with a 1 percent increase in corporate tax rates associated with a 0.5 percent drop in wage rates. No wonder the OECD found corporate taxes to be "the most harmful for growth" of all taxes.
Indeed, the corporate income tax is so harmful that we should just get rid of it. That would really help America's struggling middle class. Economic modeling conducted by Boston University economist Laurence Kotlikoff finds "a very strong, worker-based case" for swinging the ax. Fully eliminating the corporate income tax, he writes, would cause "rapid and dramatic increases" in U.S. investment, output, and real wages. More investment means more jobs, higher productivity, and higher wages. Real wages of unskilled workers would rise 12 percent over the long term, and those of skilled workers would increase 13 percent. Now, Kotlikoff's findings are probably at the high end of estimates. But they are tantalizing nonetheless.
You can imagine, too, how multinational corporations currently based in low-tax countries might suddenly see the huge advantage of headquartering themselves in the no-tax U.S.
Of course, we can't depend on this tax cut paying for itself. I can already hear the Occupy crowd squealing that the corporate income tax generates some $300 billion a year for the federal government, and that there's no way we're going to make that up with wage increases and increased stateside corporate activity. So to make up any revenue losses, AEI's Alan Viard and Eric Toder of the Urban-Brookings Tax Policy Center suggest fully taxing American shareholders at ordinary income rates on their annual dividends and capital gains. Although the 1 percent might scream at first, such a reform would "offer the huge economic advantage of eliminating the corporate income tax's numerous distortions in one fell swoop." Another unhappy group: lobbyists. No corporate tax means no need to devise corporate tax loopholes. And if they complain, well, maybe Obama could lecture them on economic patriotism.