LOL: Should Corporations Pay Taxes?

  • Joe Sestak: “Pat Toomey thinks corporations shouldn’t pay any taxes.”
  • The Truth-o-Meter says: Mostly True

I frequently use PolitiFact.com as one of two main resources for checking out the reliability of political statements and web rumors (the other resource being Snopes.com, of course). I subscribe to PolitiFact’s RSS feed. That’s how we happen to be staring at the apparently preposterous proposition that the US taxpayer should get stuck with 100% of the IRS tax bill.

This particular controversy is about the Pennsylvania race the for U.S. Senate, with Republican Pat Toomey and Democrat Joe Sestak trading potshots in the manner to which we’ve all come to expect of politicians. You can read the entire PolitiFact analysis at this link.

Narrator: “Do you think corporations pay their fair share? Pat Toomey thinks corporations shouldn’t pay any taxes.”

Clip of Toomey: “Lets not tax corporations. … I think the solution is to eliminate corporate taxes altogether.”

PolitiFact digs down into the source of this video sequence. Toomey began by arguing that taxes on corporations end up getting passed on to the consumer, “which ends up hurting economic growth”.

Taxes Affect Prices. I knew the first part. It’s a basic axiom of Econ 101 that taxes (and any other cost of doing business) are, and must be, built into the pricing model. No matter what the tax policy of a particular nation, in the long run the spread between gross profit and net profit must exceed a certain minimum margin, or it’s curtains for the corporation, shareholders and any consumer depending on that product or service.

Costs of Economic Growth. The second part is partly true and partly pure twaddle. Toomey argues that reduced corporate taxes would make the U.S. more competitive in global markets. We only have to look at Chinese competitive strategy, and the sheer size of U.S. trade imports, to realize this part of Toomey’s argument is true. For 2009 the trade deficit with China alone was 20 billion dollars (US Census data). Remember,  this represents the extent to which U.S. corporations buy from China to avoid buying from each other.

Toomey appears to realize that a zero corporate tax obligation is not politically or economically feasible, but would settle for a tax reduction: “I’d prefer none on corporations, but much lower would be better.”

Twaddle: Whether lower corporate tax or zero, Toomey’s argument assumes that most or all of the savings in the costs of doing business would end up being passed on to the consumer in the form of lower prices, while simultaneously increasing U.S. sales volumes.

  • It’s folly to suppose that Congress could agree to pay for reduced corporate taxes by coordinated reductions in U.S. spending, so the slack would be picked up by reductions in services (which would have to be paid for some other way), and by increases in the individual income tax rate.
  • Therefore a cut in the corporate tax rate could further erode U.S. consumer purchasing power, causing an even greater weakening of the U.S. economy.
  • “Demand pull” does not necessarily reduce prices even if we can afford to buy more. Contrary to classic free-market theory, prices are elastic upward, not downward. In the last 52 weeks, oil has gone from $92.75 to $74 a barrel (20% reduction) but gasoline in my area has fallen from about $3.59 a gallon to $3.16 (12% reduction).

Conclusions:

  • Conservative free-market rhetoric is jingoistic and poorly thought out.
  • A sea change in U.S. economic direction requires broad-based popular support and understanding. It has to be underwritten by the taxpayer. No one political party or ideology will ever be able to accomplish this on its own.
  • Toomey’s plan is also poorly thought out. Its arguments would make just as much sense if the proposition were to eliminate individual income taxes and let corporations pick up 100% of the tab.
  • The U.S. trade deficit and global competitive position are serious long-range issues and must be dealt with.
  • Unfair trade-off: Toomey’s plan probably would increase U.S. competitiveness in global markets, while adversely affecting domestic consumption.

The quaint notion that there’s some equitable mix of corporate and individual taxes is a dangerous misunderstanding. Toomey’s arguments rest on the assumption that the two main sources of tax revenue are economically intertwined.

So it is strange, to say the least, that he would favor a reduction in one of the components with no mention of its impact on the other.

If it’s a stealth spending reduction Toomey is really favoring, elimination of the three trillion dollar war ($500,000 a minute) would go a long way in the right direction.  Toomey is a libertarian-leaning conservative with a disregard for civil rights (go figure) whose voting record supported the Iraq war.

Toomey isn’t challenging the U.S. tax structure; he’s only whining about who should shoulder the burden, which is still to say, he doesn’t think our pals in corporate America should shoulder any of it … in an idealized Big Rock Candy Mountain conservative world of the future.

VAT

If we want to open the Pandora’s Box issue of who should pay taxes, let’s expand the discussion to include looking at the European-style VAT (value-added tax). Everybody pays it (directly or indirectly), nobody gets to weasel out, and we could dump the universally despised federal income tax entirely.

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FairTax Act Proposal

I’m getting emails about the “Fair Tax Act” that’s making the internet circuit.

The FairTax Act (HR 25, S 1025) is nonpartisan legislation. It abolishes all federal personal and corporate income taxes, gift, estate, capital gains, alternative minimum, Social Security, Medicare, and self-employment taxes and replaces them with one simple, visible, federal retail sales tax administered primarily by existing state sales tax authorities.

I’ve been in favor of a national sales tax for, my gosh, over 40 years now. This alone practically guarantees we’ll never get it.

In the 1970’s, Howard Jarvis (of California Prop 109 fame) took his “we’re mad as hell and we’re not going to take it any more” tax relief bandwagon to Sweden, one of the most highly taxed and nationalized countries on earth.

The Swedes have socialized medicine, nationalized cradle to grave health insurance, subsidized housing and every other benefit that gives conservatives nightmares in most of the rest of the world. Last I heard, they also had one of the highest literacy and longevity rates in the world, and one of the highest standards of living.

The Swedes weren’t interested in Jarvis or his tax relief ideas. Jarvis found he wasn’t really even welcome there. He wondered why. He returned to the United States with the explanation that Swedes just liked the idea of everybody having their hands in everybody else’s pockets too much to give it up.

As you might suspect, each Swede secretly believed they were dipping into others’ income more than others were dipping into theirs.

And it’s the same here. You have until the day after tomorrow to file your Form 1040. I would just go ahead and file. Don’t hold your breath.

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