Market Overview

Should Corporate Income Tax In The U.S. Be Abolished?

Should Corporate Income Tax In The U.S. Be Abolished?

As with any controversial topic, the question of corporate incomes taxes – whether to impose them or not - has two sides. In a January 5 OpEd in The New York Times, Boston University economics professor, Laurence Kotlikoff took the “dump them” side.

According to Kotlikoff, eliminating or lowering corporate income taxes was mainly about preserving and growing jobs.

The professor pointed to concessions made by union workers in Seattle designed to ensure Boeing (NYSE: BA) would build its new 777X there instead of somewhere else. According to Kotlikoff, beyond the need for union concessions, the burden of corporate income taxes that force corporations to move resources offshore was much more important.

Kotlikoff’s “poster child” example was Apple (NASDAQ: AAPL) which, according to one calculation, paid 8.2 percent of profit in U.S. corporate income taxes thanks to a practice of putting most of its operations overseas.

By some accounts, the United States has the highest effective marginal corporate income tax rate of any developed country. Jack Mintz, director of the School of Public Policy at the University of Calgary said the corporate tax rate in the U.S. was almost 35 percent.

Kotlikoff and others in the Tax Analysis Center created a large-scale computer simulation model of the U.S. economy and studied it after changing American corporate income tax rates over time.

By eliminating corporate income taxes, the model indicated, capital stock (machines and buildings) could go up 23 percent, output could increase by 8 percent, and wages could rise by 12 percent.

Related: It's That Annual Congressional Ritual: Tax Credit Roulette

As might be imagined, Kotlikoff has his detractors. Among them, Paul Buchheit, of Buchheit said, not only should the corporate income tax not be eliminated, but that it should be doubled.

Buchheit countered Kotlikoff’s arguments by saying it was folly to assume corporations would reinvest any tax savings in the economy or in workers. He pointed to 2004 when a “repatriation holiday” permitted companies to bring foreign profits home at a lowered tax rate.

In that instance, Buchheit said, corporations used more than 90 percent of the savings to "enrich shareholders and executives" with dividends and stock buybacks. In addition, he said, the same companies cut jobs and spending on research.

Buchheit argued that although the U.S. may have the highest effective marginal corporate income tax rate in the world, the effective rate is actually not very high at all. From 1987 to 2008, it was 22.5 percent. Since 2008, the figure has dropped to 10 percent – despite the fact profits have doubled in less than 10 years.

With the Bureau of Labor Statistics reporting a loss of almost 4 million jobs since the recession, Buchheit said that indicates corporations were not investing in the U.S., despite the fact they enjoyed massive profit gains over that span of time.

Finally, Buchheit cited the so-called “Irish Miracle” of the 1980s which Kotlikoff said became a “mirage driven by clever use of tax-haven rules and a huge credit boom that permitted real estate prices and construction to grow quickly before declining ever more rapidly." In other words, it was a bubble and not the fault of lower taxes.

Instead, Buchheit said, a lack of tax revenue caused Ireland to, as Paul Krugman noted, become “… just like us, only more so.” In other words, Ireland adopted an anti-regulatory, unsupervised version of the U.S. economy, leading to its failure.

Buchheit concluded by advocating for a minimum tax on U.S. corporate income or some combination that included payment for use of infrastructure and government research along with a minimum mandatory investment in job creation.

Ultimately, arguments either favor lower taxes to provide incentive for corporations to invest in the U.S. economy or more regulation (and higher taxes) as a means of enforcing positive corporate citizenship.

At the time of this writing, Jim Probasco had no position in any mentioned securities.

Posted-In: 777X American Apple BoeingNews Events Media Personal Finance Best of Benzinga


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