Tax Reform: End the Corporate Income Tax to Grow Economy & Wages

The Corporate Income Tax, today, collects just 1.8% of GDP, and accounts for only 8% of total federal revenues.  By comparison, at its peak in 1952 the CIT amounted to one-third of federal revenues.  Corporations have employed every legal resource to reduce their tax liability, and while some multi-national corporations park profits in lower-taxed countries, others with less ethical boundaries claim overseas subsidiaries in tax havens and transfer their profits to a mailbox.

With the CIT having been perversely minimized, the VATinfo website has endorsed the concept of sweeping tax reform, at once eliminating the Corporate Income Tax and replacing it with a Value Added Tax, and combining it with a progressive Personal Income Tax employing a large standard deduction and no other deductions.  VATinfo’s rough “Smart Tax” calculation…based upon IRS tables with insight provided by IRS and the Tax Policy Center at Brookings Institute…projected that a VAT tax rate of 9% would be required to replace the CIT and offset a Personal Income Taxes cut for incomes under $100,000.  (The plan envisioned eliminating the PIT for filers with Adjusted Gross Income under $50,000…two-thirds of all filers; reducing the PIT by 56% for those with AGI between $50,000 and $75,000; reducing the PIT by 17% for those with AGI between $75,000 and $100,000.)

In December 2013, the National Bureau of Economic Research released a working paper, “Simulating the Elimination of the U.S. Corporate Income Tax,” with very reinforcing conclusions.  Foremost is the understanding that when U.S. capital moves to a lower-taxed country, U.S. workers suffer a loss in labor demand and real wages.  And, the reverse would be true were the U.S. to end the CIT.  The study projects that capital would flow to the U.S. resulting in “a rapid and sustained 23 to 37 percent higher capital stock.”  “Higher capital per worker means higher labor productivity and, thus, higher real wages.  Indeed, in the wage-tax simulation, real wages of unskilled workers end up 12 percent higher and those of skilled workers end up 13 percent higher.”

The NBER study concludes that while the economic gains from eliminating the CIT would fall short of replacing the revenue loss entirely (requiring an increase in taxes on wages, or a consumption tax), there would be relative distributional gains accruing to both skilled and unskilled workers, i.e., addressing income inequality.

Hollings, Sen. Fritz, “Building the Economy,” HuffingtonPost.com, 02/14/12

 “Just at the time we need government, all the candidates run “against big government.” “I served in government, but didn’t inhale.” “Get government out of the way so market forces can work.” Who do they think developed the economy? Not market forces. Not Corporate America, whose executives caterwaul “free trade;” “protectionism.” The government of China develops the most closed, controlled economy in history, and Corporate America off-shores to China.

The founding fathers taught us that government creates the economy. The U.S. was born in a trade war (the Boston Tea Party) and President George Washington’s first message to Congress emphasized “manufactories.” The government developed our economy with the Tariff Act of 1789. The Mother Country opposed this development, cautioning against protectionism, calling for “free trade,” and nagging David Ricardo’s “doctrine of comparative advantage” — England’s textiles versus Portugal’s wines. But Alexander Hamilton saved us with his famous “Report on Manufactures,” and Henry Clay exclaimed on the floor of the United States Senate in 1836 that free trade “never existed; it never will exist… ” Abraham Lincoln was a protectionist. Theodore Roosevelt wrote a friend: “Thank God I’m not a free trader.” We didn’t pass the income tax until 1913. We built this nation with protectionism into an economic superpower, “… twenty-five billion dollars more than her nearest rival, Great Britain… ” (Theodore Rex, Edmund Morris, p. 20). President Theodore Roosevelt kept market forces from working with anti-trust laws so that we have an open market today.

How do you think government builds a strong economy? Paying its bills, incentives and enforcing its trade laws to protect investment. Globalization is nothing more than a trade war with production looking for a government cheaper to produce. In globalization the war has expanded from trade to research, technology, innovation, production, jobs, payrolls — the economy. Corporate America has $3 trillion ready to invest, waiting for the President and Congress to determine the increase in revenues bound to occur. Corporate America demands protection. Rather than bailing out Detroit, President Obama could have protected motor vehicles by imposing a tariff on auto imports like Brazil is now imposing. Rather than begging Russia for helicopters, President Obama should enforce the War Production Act of 1950 which would create millions of jobs. Everyone knows that you can’t build a strong economy with federal aid to keep the policemen, firemen and teachers in their jobs or cut payroll taxes which Wall Street executive, Steve Rattner, says: “… provides little lasting benefit. We could just as effectively throw borrowed hundred-dollar bills out of airplanes.”

How could President Obama and Congress bring Corporate America back from China? Easy. Just take the tax benefit to off-shore and give it to Corporate America to on-shore — cancel the 35 percent corporate tax and replace it with a 6 percent value added tax. Immediately, the CEOs, tax lawyers and tax lobbyists cry: “We can’t have a national sales tax.” 141 countries compete in globalization with a VAT or national sales tax. Replacing the corporate tax with a 6 percent VAT is on value added, not sales, and a tax cut. Reason for the howls: a VAT has no loopholes. The CEOs and Corporate America with today’s loopholes are not paying any tax. They could care less about building our economy. China is getting difficult every day. This tax cut releases $3 trillion for Corporate America to create millions of jobs in the United States. The 2010 corporate tax produced $194.1 billion in revenues. A 2010 6 percent VAT would have produced $700 billion in revenues. Exemptions for the poor leave billions to pay down the debt. The VAT is on consumption — the more you consume, the more you pay. Now folks can pay their fair share of taxes. The VAT promotes exports and is self-enforcing. A good bit of the IRS is eliminated, reducing the size of government.”

http://www.huffingtonpost.com/sen-ernest-frederick-hollings/building-the-economy_b_1277012.html

O’Shaughnessy, Revere Copper Chrmn., Calls for VAT to Spur Growth

Using VAT for Jobs, Health and Retirement

The media debate about VAT has missed the mark.  Strategically employed, VAT can legally promote and protect domestic production of anything mined, made, grown or serviced in any country.  The question is not whether we have new taxes, high taxes or low taxes.  The question is whether we have smart or dumb taxes in relation to promoting economic growth and international competitiveness.

VAT is a valuable tool used by 153 countries to gain a competitive edge in trade with the USA.

Americans simply look at VAT as a Value Added Tax on goods and services at each stage of production.  In this narrow view, VAT is a consumption tax that is regressive.  Overlooked is the strategic importance of VAT to international trade, domestic jobs and real wages if used intelligently.

The VAT becomes just like a tariff when the proceeds are used to subsidize production in any country competing with another.  The average VAT worldwide is about 16%.  The proceeds of VAT can be used like any tax in many ways.  One way is to fund health care costs.  This remains true whether or not the nation’s health care system is socialized or private.

Let’s look at a real world example of how this impacts my company—Revere Copper Products.  Revere fabricates copper and brass products for further manufacturing and for building and construction markets.  Revere has a health care plan for its employee owners.  Imagine Revere workers on the factory floor producing a coil of copper.  The price Revere sells it for must cover their wages and salaries plus the cost of metal, energy, equipment, materials and supplies as well as taxes and their own health care costs.  When that Revere product is shipped abroad, the foreign country applies a VAT.  Some of the proceeds of that VAT are used to help pay for the health care cost of the citizens of that country, not ours.

http://www.tradereform.org/2012/01/brian-oshaughnessy-on-the-vat/

Hollings, Sen. Fritz, “Shameful Conduct,” HuffingtonPost.com, 10/05/11

“I don’t know what the demonstrators want Wall Street to do, open earlier; cut the price of stocks? Demonstrators mistake result for cause. Business doesn’t create the business climate or economy. Government does. Business takes advantage of the business climate that the U.S. government has developed. Capitalism has a tendency to monopolize.

That’s why government institutes anti-trust laws and restrictions to keep the market open. But an open market doesn’t mean a free market. In globalization, with China setting the competition, the market is definitely not free. Corporate America shouts “free trade” but creates jobs and develops the most closed market in China…”

“…The first order for government is to take the tax benefit for corporate America to off-shore jobs and give it to corporate America to on-shore jobs — cancel the corporate tax and replace it with a 6 percent value added tax. Last year’s corporate tax produced $194.1 billion, whereas a 6 percent VAT for 2010 produces $700 billion in revenues. Exemptions for the poor leaves billions to pay down the debt.

With no loopholes, a VAT produces instant tax reform, which puts the tax lobbyists out of business. The VAT replacement releases $1.2 trillion in off-shore profits for corporate America to create jobs in the United States. The VAT is like a sales tax, but not on the sales price — only on the value added or seller’s mark-up…”

“…Wall Street, the big banks, and corporate America are happy for Congress to do nothing. They oppose the enforcement of trade laws; oppose a VAT because it increases the cost of imports, and oppose the repeal of the subsidy to off-shore jobs. Wall Street, the big banks, and corporate America are the biggest contributors to the president and Congress. So the president refuses to enforce our trade laws. The president and Congress oppose the VAT solution even though they are for tax cuts; and they oppose repeal of the subsidy to off-shore profits.

Replacing the corporate tax with a 6 percent VAT would make it profitable for corporate America to produce and create jobs in the United States…”

http://www.huffingtonpost.com/sen-ernest-frederick-hollings/value-added-tax_b_996626.html

Barro, Robert J., “How to Really Save the Economy,” New York Times, 09/11/11

“I received vigorous criticism from conservatives after advocating a VAT in an essay in The Wall Street Journal last month. The main objection — reminiscent of the complaints about income-tax withholding, which was introduced in the United States in 1943 — is that a VAT would be a money machine, allowing the government to readily grow larger. For example, the availability of easy VAT revenue in Western Europe, where rates reach as high as 25 percent, has supported the vast increase in the welfare state there since World War II. I share these concerns and, therefore, favor a VAT only if it is part of a package that includes other sensible reforms. But given the likely path of government spending on health care and Social Security, I see no reasonable alternative.

Abolishing the corporate income tax is similarly controversial. Any tax on capital income distorts decisions on saving and investment. Moreover, the inefficiency is magnified here because of double taxation: the income is taxed when corporations make profits and again when owners receive dividends or capital gains. If we want to tax capital income, a preferred method treats corporate profits as accruing to owners when profits arise and then taxes this income only once — whether it is paid out as dividends or retained by companies.

Liberals love the idea of a levy on evil corporations, but taxes on corporate profits in fact make up only a small part of federal revenue, compared to the two main sources: the individual income tax and payroll taxes for Social Security and Medicare.

In 2009-10, taxes on corporate profits averaged 1.4 percent of G.D.P. and 8.6 percent of total federal receipts. Even from 2000 to 2008, when corporations were more profitable, these taxes averaged only 1.9 percent of G.D.P. and 10.3 percent of federal receipts. If we could get past the political fallout, we could get more revenue and improve economic efficiency by abolishing the corporate income tax and relying instead on a VAT.”

http://www.nytimes.com/2011/09/11/opinion/sunday/how-to-really-save-the-economy.html?pagewanted=1&tntemail0=y&_r=1&emc=tnt

 

 

Selling a Tax Increase, What Would Reagan Do?

President Obama could end the Congressional budget stalemate by going to the people directly, as President Reagan did in his first term.  At that time, President Reagan needed to break a deadlock on his tax reform proposal.  The solution was to go on prime-time TV and appeal to the public to send postcards in support to their Congressional representatives.  Granted, a tax cut is an easy sell, and a tax increase a hard one, but the idea is to provide needed cover to Republicans (and some Democrats) to compromise on raising taxes.

Technology favors this approach today, as much easier emails would replace postcards, and the volume of response would surely be higher than Reagan’s successful appeal.  A website would be created to offer direct links to the email addresses of Congress by zip code with pre-formatted messages, e.g., “I support the return to Clinton-level taxes on January 1, 2013. I am willing to pay my fair share to reduce our deficit and debt.”  A web blast could complement a TV appeal.

Polls also favor this approach.  A review of 2011 polls on taxes compiled by Bruce Bartlett reveals that Americans will support President Obama’s call for increased taxes:

(Bruce Bartlett’s blog: CapitalGainsandGames.com)

“Americans Support Higher Taxes. Really.,” June 29, 2011

Contrary to Republican dogma, polls show that the American people strongly support higher taxes to reduce the deficit and improve income inequality. Following are 19 different polls since the first of the year that say so.

A June 9 Washington Post/ABC News poll found that 61 percent of people believe higher taxes will be necessary to reduce the deficit.

A June 7 Pew poll found strong support for tax increases to reduce the deficit; 67 percent of people favor raising the wage cap for Social Security taxes, 66 percent raising income tax rates on those making more than $250,000, and 62 percent favor limiting tax deductions for large corporations. A plurality of people would also limit the mortgage interest deduction.

A May 26 Lake Research poll of Colorado voters found that they support higher taxes on the rich to shore-up Social Security’s finances by a 44 percent to 25 percent margin.

A May 13 Bloomberg poll found that only one third of people believe it is possible to substantially reduce the budget deficit without higher taxes; two thirds do not.

A May 12 Ipsos/Reuters poll found that three-fifths of people would support higher taxes to reduce the deficit.

A May 4 Quinnipiac poll found that people favor raising taxes on those making more than $250,000 to reduce the deficit by a 69 percent to 28 percent margin.

An April 29 Gallup poll found that only 20 percent of people believe the budget deficit should be reduced only by cutting spending; 76 percent say that higher taxes must play a role.

An April 25 USC/Los Angeles Times poll of Californians found that by about a 2-to-1 margin voters favor raising taxes to deal with the state’s budget problems over cutting spending alone.

An April 22 New York Times/CBS News poll found that 72 percent of people favor raising taxes on the rich to reduce the deficit. It also found that 66 percent of people believe tax increases will be necessary to reduce the deficit versus 19 percent who believe spending cuts alone are sufficient.

An April 20 Washington Post/ABC News poll found that by a 2-to-1 margin people favor a combination of higher taxes and spending cuts over spending cuts alone to reduce the deficit. It also found that 72 percent of people favor raising taxes on the rich to reduce the deficit and it is far and away the most popular deficit reduction measure.

An April 20 Public Religion Research Institute poll found that by a 2-to-1 margin, people believe that the wealthy should pay more taxes than the poor or middle class. Also, 62 percent of people believe that growing inequality of wealth is a serious problem.

An April 18 McClatchy-Marist poll found that voters support higher taxes on the rich to reduce the deficit by a 2-to-1 margin, including 45 percent of self-identified Tea Party members.

An April 18 Gallup poll found that 67 percent of people do not believe that corporations pay their fair share of taxes, and 59 percent believe that the rich do not pay their fair share.

On April 1, Tulchin Research released a poll showing that voters in California overwhelmingly support higher taxes on the rich to deal with the state’s budgetary problems.

A March 15 ABC News/Washington Post poll found that only 31 percent of voters support the Republican policy of only cutting spending to reduce the deficit; 64 percent believe higher taxes will also be necessary.

A March 2 NBC News/Wall Street Journal poll found that 81 percent of people would support a surtax on millionaires to help reduce the budget deficit, and 68 percent would support eliminating the Bush tax cuts for those earning more than $250,000.

A February 15 CBS News poll found that only 49 percent of people believe that reducing the deficit will require cuts in programs that benefit them; 41 percent do not. Also, only 37 percent of people believe that reducing the deficit will require higher taxes on them; 59 percent do not.

A January 20 CBS News/New York Times poll found that close to two-thirds of people would rather raise taxes than cut benefits for Social Security or Medicare in order to stabilize their finances. The poll also found that if taxes must be raised, 33 percent would favor a national sales tax, 32 percent would support restricting the mortgage interest deduction, 12 percent would raise the gasoline taxes, and 10 percent would tax health care benefits.

On January 3, a 60 Minutes/Vanity Fair poll found that 61 percent of people would rather raise taxes on the rich to balance the budget than cut defense, Social Security or Medicare.

The economic risk of failure to reach a compromise agreement within two to three weeks warrants the political risk of appealing to the public to provide the cover for opponents to tax increases.  The overwhelming odds are it would succeed.


Dadash, Uri & William Shaw, “Competitiveness: The Great American Distraction,” VoxEU.org, 06/28/11

“Insofar as the US structural current-account deficit reflects inadequate savings – as it clearly does – reducing it is desirable. Doing so efficiently requires that policymakers focus on fiscal reforms that not only reduce the budget deficit directly but also make public spending more effective and nudge the private sector toward producing more exports and reducing imports.

Three types of tax reforms clearly meet these criteria: increased gasoline taxes, a value-added tax, and a phased-in elimination of the mortgage interest deduction.

The US has held its federal gasoline tax at 18.4 cents per gallon since 1994, while other OECD countries have instituted much higher rates. Raising the US gas tax would directly improve the fiscal deficit – raising the tax to only half the OECD average could generate approximately 1% of GDP – and it would help reduce the current-account balance, as oil imports fall. Because the disposable income of consumers would decline, other imports and consumption could decrease as well. Over time, renewable energy sources, alternative means of commuting (including telecommuting), changes in residence or work location, and more efficient cars will mitigate the effect of the initial rise in gasoline prices. The gain in tax revenues will also be smaller as Americans adapt by consuming less gasoline.

A value-added tax (VAT) could also reduce the fiscal and current-account deficits. The CBO estimates that applying a 5% VAT to most goods and services in 2013 would raise $180 billion (1.2% of GDP) that year and $2.5 trillion through 2021 (1.4% of GDP over the period) (CBO 2011). Meanwhile, charging VAT on imports while rebating VAT payments to exporters, a universal practice, would strongly tilt incentives in favor of exporters. At the same time, introducing the VAT could increase the efficiency of the tax system (Hufbauer 2011) and would require limited administrative resources for enforcement, as firms purchasing inputs have an incentive to ensure that sellers fully state their VAT payments. Finally, a VAT could increase household savings by taxing all consumption goods and allowing households to earn interest on savings free of VAT.

The mortgage interest tax deduction, on the other hand, must be gradually eliminated to reduce the deficit. It will cost an estimated $100 billion in 2011 and artificially encourages spending on and investment in real estate, a highly volatile sector. Eliminating the subsidy would help direct savings to more stable assets, reduce individuals’ reliance on household equity to finance consumption during booms, and improve income distribution (subsidizing home purchases disproportionally benefits the rich, who typically buy houses, over the poor, who typically rent). It would also free resources for investment in internationally-competing sectors.”

http://temporaryaddress.voxeu.org/index.php?q=node/6697

Stern, Andy (fmr. SEIU President) at Committee for Economic Development, 06/10/11

Andy Stern states his six-point program for economic renewal, including VAT.

Morici, Peter, “U.S. economy creates only 54,000 jobs in May,” UPI.com, 06/05/11

“Millions of jobs could be created by: drilling for more domestic oil and gas now, which would keep money here that American drivers send to the Middle East; taxing dollar-yuan conversion to offset China’s currency market intervention, undervalued currency and 35 percent subsidy on its exports; genuine healthcare reform that lowers drug, insurance and administration costs, and tort burdens, rather than subsidizing a system that costs 50 percent more than private systems in Germany and elsewhere; and replacing the corporate income tax and elements of the personal income and social security tax with a value-added tax.

America has the tools at hand but U.S. Treasury Secretary Timothy Geithner fails to grasp the gravity of the situation and President Barack Obama isn’t ideologically disposed and lacks the stomach to use them. Sadly, we aren’t hearing much about those solutions from the cacophony of Republicans seeking the presidency either. Tax cuts and deregulation, vouchers and other Tea Party hobby horses are palliatives, not problem solvers.

Policymakers must address the world as they find it, not as professors and presidents pontificate it should be.  America isn’t suffering from a poverty of ideas but shortage of leaders with the vision and courage to see what is possible and act.”

http://www.upi.com/Top_News/Analysis/Outside-View/2011/06/03/Outside-View-US-economy-creates-only-54000-jobs-in-May/UPI-90101307107450/?spt=hs&or=an

Kocieniewski, David, “U.S. Business Has High Tax Rates but Pays Less,” The New York Times, 05/03/11

“The paradox of the United States tax code — high rates with a bounty of subsidies, shelters and special breaks — has made American multinationals “world leaders in tax avoidance,” according to Edward D. Kleinbard, a professor at the University of Southern California who was head of the Congressional joint committee on taxes. This has profound implications for businesses, the economy and the federal budget…”

“…In addition to being complex and uneven, the United States corporate tax code is inefficient and has become a diminishing source of revenue. Corporate taxes accounted for about 9 percent of all federal revenue in 2010. At $191 billion, they were equal to 1.3 percent of the nation’s gross domestic product. Most industrial countries collect more from companies, about 2.5 percent of output. Only a portion of that disparity can be explained by the many types of businesses in the United States that elect to be taxed at an individual rate.

‘Whether the test is fairness or efficiency, the U.S. system gets really low marks,’ said Michelle Hanlon, an M.I.T. professor who says the country needs to completely revamp the way it taxes corporations…”

“…Robert A. McDonald, P&G’s top executive, testified before a Congressional committee this year about the need to cut the United States tax rate without ending tax breaks and shelters. “We need a tax system that addresses today’s hypercompetitive global marketplace,” Mr. McDonald said, arguing that the playing field was tilted away from American businesses.”…

“…No one is certain how much creative accounting costs the federal government in lost revenue, but most estimates say it easily exceeds $50 billion a year. Targeted tax preferences, which Congress created to intentionally benefit specific companies or industries, cost an estimated $100 billion more a year.”

http://www.nytimes.com/2011/05/03/business/economy/03rates.html?src=me&ref=business