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If We Must Have a Corporate Tax, Let's Tax Gross Receipts
by John Tamny, Toreador Research and Trading (Guest Contributor)
Taxes are always on the mind of the electorate, and while individual rates of taxation garner the greatest fraction of our attention, the way corporations are taxed is important too. A change in direction in this area could potentially free up a lot of capital, all the while reducing a great deal of waste.
By now most investors are familiar with the statistic showing that the U.S. rate of taxation, at 35%, is only exceeded by that in Japan among economically developed countries. Those who would like to see it lower argue that the high rate is reducing company formation stateside, so the clear answer is to reduce it.
No doubt the above is a worthy goal, but it brings to mind the old saying that "if you want the government out of your pockets, remove your hands from its pockets." To get to a lower corporate tax rate it would be essential to abolish the myriad corporate deductions that presently dictate a high headline rate.
In short, the ideal corporate tax would be a flat tax rate levied on gross receipts. All businesses would be equal before the IRS, and could be judged by investors solely on the basis of their economic prospects, as opposed to prospects that to varying degrees are distorted by the tax code.
Distortions. In the tax bill recently passed by Congress, businesses will enjoy some new tax write-offs, and the most notable one concerns expenditures on capital equipment. Businesses will be able to depreciate immediately 100% of new equipment in 2011, and 50% in 2012.
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The problem with such a write-off is fairly obvious. As numerous Wainwright Economics publications have made plain over the years, government policies can't stimulate economic activity as much as they can reschedule it. Stimulus today realistically implies stagnancy down the road.
In this case, businesses have the incentive to bring forward capital expenditures into the current year and (less) into 2012, but logic tells us that will reduce similar expenditures that would otherwise have been made beyond 2012.
Worse than that, no reasonable business opportunity can attract capital based merely on its ability to simply spend it. Enterprises are in business to generate profits for shareholders; if tax policy invites activity meant to reduce taxable profits, economy-sapping distortions will surely be the result.
Google, for instance, was largely founded on cheap computer servers. Its profits weren't then, and aren't now, driven by capital expenditures as such, but by innovative concepts of the mind that have led to the creation of the most widely used search engine on the Internet.
In the case of Google, it's a clear distortion that a business reliant on heavy equipment expenditures can enjoy tax deductions that innovative companies largely reliant on intellectual capital cannot. Under our current system, the Googles of the U.S. - unless they can find non-economic activities that please Washington and the tax code - are taxed at relatively high rates so that equipment-heavy companies can enjoy a tax break.
Likewise, there's been talk for quite some time that to reduce unemployment, labor-intensive companies should enjoy tax write-offs to hire workers. This is once again mistaken thinking. No business in a truly capitalist world could attract capital based on a business plan that involves increasing its costs per unit of production.
But if the tax code reduces labor costs, businesses reliant on expensive human inputs benefit at the expense of other, less labor intensive companies. Be it human or equipment capital, tax policy that subsidizes the excessive purchase of either encourages waste. Sub-optimal allocation of the basic means of production means a less vibrant economic outlook.
Indeed, unless corporations have growth-related needs that would enhance profitability, tax policy should encourage the disgorgement of excess capital in the form of dividends. By that channel, what is always limited capital would then hook up with new, innovative concepts needful of funds necessary for development.
Tax policy that subsidizes the purchase of human and mechanical capital encourages businesses to consume, waste or retain funds that could be matched to higher economic uses if paid out to shareholders. When the tax deductions make economically viable what would otherwise not be, those that benefit have their operations distorted. That's not to mention the concepts that will never see the light of day at all thanks to capital retention and waste.
The simple truth is that economics is about scarcity. What's perhaps not discussed enough is how tax incentives that encourage the purchasing of capital inputs raise the cost of everything for all businesses, large and small.
If for instance FedEx chooses to buy new delivery trucks rather than maintain its existing fleet thanks to the former being tax efficient, there are necessarily fewer trucks for businesses more needful of them to grow. The artificial demand wrought by tax breaks must on the margin drive up their cost.
The end result is that smaller enterprises on the way up face higher equipment costs due to tax breaks for existing businesses. Thanks to the tax code, large companies, by virtue of being large, make the launch of a new business concept more costly.
Similarly, smaller businesses would face increased hiring costs if employee additions for existing companies were made tax deductible. Skilled human inputs in what is increasingly a knowledge economy are a precious commodity for businesses of all sizes. To put it simply, employee hiring that is encouraged by the tax code leads to a less economic and more wasteful allocation of human capital.
A lower, flatter, corporate tax. With a lower, flat tax on gross receipts, it becomes apparent quickly that a better allocation of capital would result. Companies would have less incentive to retain or waste capital. And originators of up and coming concepts would have greater access to funds more quickly released to shareholders.
Second, businesses made viable only by tax subsidies would quickly cease to exist in their present form, and rather than disappearing, their assets would instead be snapped up by better run, more economically realistic entities eager to pursue economically viable modes of expansion.
Third, tax compliance itself is costly. To monitor and maintain compliance, company resources must be diverted from productive use. While businesses would lose in the near term for deductions abolished, they would gain over the long term from a flatter, lower, more understandable structure; one that would enable them to reduce compliance costs.
Would a flat gross receipts tax kill investment? One argument made against abolishing tax breaks is that reduced profitability among the beneficiaries of deductions would decrease investment across the board. This fear seems overdone.
For one, if the tax code is what is propping up certain businesses, then it's a certainty that those harmed are not good stewards of capital to begin with. As always, we live in a capital constrained world, so it would be better to starve the businesses not viable under a tax system that doesn't play favorites.
Second, history is pretty clear that if a business concept is viable, there will be investment to fund it. Though oil exploration has historically been a "crapshoot" of sorts with profits from it distant, investment in what is a very uncertain pursuit has long existed in abundance. And pharmaceutical companies, despite the long odds that their health innovations will eventually reach the market in a profitable way, have always been able to attract significant investors seeking outsized gains. While potentially innovative companies would no longer enjoy deductions on equipment, labor and R&D, it's a fair bet that if their business models were sound that they would find willing capital markets.
Even better, a gross receipts tax presumes a much lower, flatter tax in return for lost deductions. Economically viable concepts that prove appealing to consumers would attract tax-conscious investors.
Conclusion. Governments cannot create economic growth. They can, however, divert, reschedule and distort growth through monetary and tax machinations that disfigure economic activity on the way to waste.
Governments can also play favorites with the tax system, doling out deductions to the companies that are equipment intensive, aggressive in their hiring, and that pursue concepts favorable to the powers-that-be. The end result is that tax breaks, rather than the simple drive for profit, to varying degrees drive and distory economic activity.
Worse, the companies that do the most with the least, meaning the very companies with the potential to attract the most growth-enhancing investment, are forced to pay higher tax rates in order to make viable more questionable uses of funds. And to the extent that taxes create incentives for non-economic expansion, the economy loses twice: first for wasteful economic activity being pursued by tax-favored businesses, and second for earnings being retained, rather than redistributed to investors so that they can become fresh capital flowing into new, innovative concepts.
The answer as always is for the government to simply get out of the way. If it must tax corporations, its taxation should be blind in the way that justice is. A flat gross receipts tax would make all corporations equal before the IRS. That would ensure the most economic allocation of capital on the way to rational, market-driven growth.
Mr. Tamny is a senior economic advisor to Toreador Research & Trading, columnist for Forbes and editor of RealClearMarkets.com. Mr. Tamny frequently writes about the securities markets, along with tax, trade and monetary policy issues that impact those markets for a variety of publications including the Wall Street Journal, National Review and the Washington Times. He’s also a frequent guest on CNBC’s Kudlow & Co. along with the Fox Business Channel.
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Zzzzzz... the most nefarious "tax" of them all is the inflation "tax". We need to work on that one first. IMO, anything else is just a band-aid.
Retarded. First off corporate taxation is double taxation plain and simple and should be abolished, so the only corporate tax I support is a flat tax of 0%. But seeing how my pet unicorn has a better chance of pooing out an air craft carrier made out of skittles, I'll just address the flat tax.
For arguments sake let say the corporate flat tax rate is 10%. If company A has gross revenues (receipts) of 10 million and company B has gross revenues of 10 million each company would owe 1 million in corporate taxes. Seems simple but if Company A runs at profit margins of 25% and Company B runs at profit margins of 5%. Company B is either going out of business or passing the increased tax burden to the end consumer. And in reality company A is going to probably pass a good deal of the costs along also. So all you are really advocating is more taxes on the populus via a VAT tax under a different name, and creating barriers to entry for new businesses. Anyone sitting around figuring out new ways to burden the productive so that the cancerous monstrosity of government can take more of my labor is part of the problem. Thank you for posting this as I now can add Toreador to the list.
I think it would be better to have no tax exemptions, deductions or loopholes.
Any business that exports is at a disadvantage when competing against European companies that are given credit for any taxes they have paid for products they export. The only real fix for corporate taxes is to eliminate all taxes and subsidies on corporations and for the corporate net profit to flow to each shareholder's personal income based on the number of shares they hold. The great advantage is that it allows US companies to compete to the maximum extent possible in foreign competitive situations.
The only downside I see, (small one,LOL), is Bye Bye, Offshore.
They would have to keep the increase far smaller than foreign countries.
The only thing this would accomplish is a crushing blow economically by forcing business to raise prices accross the board by whatever the "Gross Tax Rate" is...and then all the consumers would STOP buying as much or getting as much Services.
I better stop before I get say some really "animated" things here.
!#@%#$!%!$#%#^&@%$&^$&^*%&*#^ Gross Receipts...
Tax Gross Receipts...R U FKN SERIUOS???? JeZus!
Ya CANT FUKN Tax GROSS anything cuz things like Employee Wages, and other input costs change and vary. Lets say your running at a 5% profit margin...that friggin means the company gets to keep 5% of the gross sales...
How Exactly would you suggest taxing business on their gross income?
How many small businesses actually operate at more than 10-15% profit? Most large business dont. And why in the hell do peopel think the govt, whos primary mission is simply to provide a Lawful Judicial system, and protect us militarily, think the govt friggin has claim to that which business make!!!!
Ive heard some stupid sh!t before, but this is really S-T-U-P-I-D.
Stupidest idea ever.
So companies with huge gross receipts and tiny margins (like supermarkets) pay nearly all the taxes while companies with modest gross receipts and huge margins (like boutiques) pay nearly none?
Hallelujah! Somebody is advocating for a simplified income tax code that makes sense!
Individuals and corporations should be taxed on their gross incomes ... no tax deductions, no tax breaks, no hidden income from employer subsidies, etc ... no exceptions.
And get rid of the tax brackets. The universal tax rate is flat (for conservatives) or increases linearly based on gross income (for liberals). Individuals and their fellow human beings (i.e., corporations) pay taxes at the same rates.
If Congress wants to tinker around and do some social financial engineering or reward corporate contributors, then make it publicly pass appropriations bills with specific line items for the cash giveaways taken from government tax revenues.
Tinkering with taxes at this point is like adjusting the deck chairs on the Titantic. It's going down. No need to machine-gun the survivors.
Most of this tax talk is twaddle, especially corporate tax talkery.
Abolish corporate taxes; tax the be-jeebers out of dividends and bonuses to encourage
re-investment. And pass a versionof the fair tax with a high standard deduction a surcharge above $1MM.
Today's Economic Times mandate the end of all Corporate WellFare too
Glass-Steagall re-instate, broad across the board prosecution of financial theft, heavy regulation of naked derivative trades, heavy world wide control of off shore banking, significant tax on the financialisation trade transaction to discourage "financial wankers" making bonus from drying the real, physical market of badly needed credit. Heavy corporate taxation at levels around 35%. Curtail central banks from doing monetary policy manipulations unlocked with national fiscal policy. No FED czars, no banking sector manipulation of markets. Legislate through antitrust against corporate "dominant position" in markets. First and foremost, get rid of insolvency, kill the TBTF and pay off the debts through balanced budgets and balanced regional trade.
Admittedly they already tax creation of our money supply...it's called bracket creep.
Also, corporations don't pay taxes, the end of the line consumer pays taxes. The corporation is just another tax collector. Making corporations "pay" taxes only makes us somehow feel better but doesn't change the fact that they don't actually pay. Why do we not get this?
Exactly.
People running the corp pay taxes. People working for the corp pay taxes. Because the corp pays no tax it is reflected in the stock price. The stockholders pay tax when they sell the stock. Consumers pay tax when they buy the product.
Taxing corporations makes as much sense as regulating climate change and electing anyone from Chicago to sit in the Oval Office.
Agree. It has been pointed out here in numerous articles how little corporations pay relative to the public. And how do you pay off your debts while giving corps a tax break as the world slides further into chaos?
The reason the tax code is so many pages is they spell out how the rich should exploit every loophole in detail. Make it simple. All it would take is a couple of pages.
Whatever "size" of government we have, we should insist on two things. 1) we collect enough revenue to cover expenses, and 2) the people in charge of governments do their jobs.
These are conservative principles even liberals can live with.
gross receipts, aye? not so fast, what about the banks? they conjure into existance our money supply, so wouldn't the repayment of this created money debt be considered gross receipts? Banks put in on the asset side of balance sheet. Imagine that; Government taxing bank's creation of our money supply. . .
I like this post. I agree almost entirely. The one change I would suggest would be a graduated gross receipt tax. Small companies should pay a lower tax rate than larger companies. Have it start at 0.25% for small cos and go to 15% for the largest. Larger companies need to pay higher taxes because of the disruption they create in the economy. We wouldn't bail out a small company but Chrysler and GM and the mega banks get bailouts, therefore they should have a higher tax rate than companies that would never get a bailout.
funk, you are well intentioned, but incorrect. large companies don't create disruption. the ONLY reason GM and Chrysler needed bailouts, was due to oversized pension funds and too high wages, which is a direct result of union intervention and outright theft. no company in their right mind would try to gouge their customers for fear of losing business to the smaller competitors. if GM for instance, had been allowed to do business their way, they would have had more capital with which to invest in more technology to make them more efficient. so taxing them more, would only reduce what they can invest. after all, these companies, while they exist to make a profit, they do so at the benefit of all who want to own a "good" automobile. try to prove me wrong, i dare you.
Joker, you are funny. Management made the decisions to agree to those lousy pension plans. Management made the decisions to sell crappy cars for decades. Management made the decision to not properly fund those bloated pension plans that they had agreed to fund. Sure unions consistently demand wages and benefits that are high. But they are nowhere near the salaries and benefits demanded by senior management. When GM came begging for a bailout the senior managers who were directly and personally responsible for the collapse of the firm flew in on jets paid for by the shareholders. It is the senior management of AIG, BAC, C, GS etc... that made the decisions to defraud the people of this country. Not the employees, not the shareholders. GM was allowed to do business the way they saw fit. And that way was to drive the company into the ground. A more competitive tax structure would have weeded out those lousy managers decades ago.
We MUST cut government in half at all levels, so the private sector can recover from the depression. Otherwise, as Ayn Rand often pointed out, the best leave first.
a specious argument. leave and go where? if you mean off shore to the cayman islands, well, that's clearly merely tax dodging which should be prosecuted. but if you think goldman sachs is about to relocate corporate hq from ny to bangolore or columbo in search of a more favorable tax code, get real.
Well for starters, to countries with less burdensome rates, and regs.Here the Corp rate is damn near Zero, of course most Corprations are ALREADY offshore.
So, give an incentive to come home.
Also, don't think for a second our FWENDS would not knife us to get the biggies.
I mean that the productive are tired of being slaves to the parasites, and are actively making alternative arrangements. Econ 201 - The more you tax productivity and innovation the less of it you will have.
It's the end of the (economic) world, and we're going to recommend to Congress the ideal corporate tax structure?
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Too much content being posted at ZH, in my humble opinion.
Too many advertisments for newsletter writters, that's for sure.
This ad is extremely puke-like in that it advocates the effective compounding of a value tax to benefit the government and strip resources from production. Every step of value being added and transacted in every value chain would be skimmed by this tax. It could not be more statist, confiscatory and regressive to progress, large P or little p.
I appreciate that ZH exposes charlatan power-grabbing posers like these guys.