Time to Eliminate the Corporate Income Tax

Here’s What Genuine Tax Reform Looks Like - The goal is to be simple and fair, with minimal damage. Step one would eliminate the corporate tax.

 Excerpt:

What would a minimally damaging, simple, fair tax code look like? First, the corporate tax should be eliminated. Every dollar of taxes that a corporation seems to pay comes from higher prices to its customers, lower wages to its workers, or lower dividends to its shareholders. Of these groups, wealthy individual shareholders are the least likely to suffer. If taxes eat into profits, investors pay lower prices for less valuable shares, and so earn the same return as before. To the extent that taxes do reduce returns, they also financially hurt nonprofits and your and my pension funds. With no corporate tax, arguments disappear over investment expensing versus depreciation, repatriation of profits, too much tax-deductible debt, R&D deductions, and the vast array of energy deductions and credits.

Comment: Image source. Literally every tax paid by corporations is ultimately passed on to consumers. With no corporate tax, all incentives to tax inversions disappear!

Behind Pfizer's bid for AstraZeneca - flee high US Corporate taxes

Pfizer's Tax Takeover - Spend $100 billion abroad rather than pay 40% at home.
Excerpt:

U.S. pharmaceutical giant Pfizer Inc. wants to buy AstraZeneca, and not just for its pipeline of cancer drugs. Acquiring the British company would also give Pfizer shareholders welcome relief from a U.S. corporate tax rate that is among the world's highest. Instead of paying punitive rates to return its money to the U.S., Pfizer figures it can get a better return paying $100 billion or so to buy a foreign company. .... Pfizer's presentation also noted the deal would be "structured to achieve an efficient tax structure." Mr. Read noted the "negative impact" of the U.S. tax code, which would be "problematical" if applied to the money AstraZeneca now earns in the U.K. That's because the combined state-federal corporate income tax rate in the U.S. is nearly 40%, compared to the 21% rate in the U.K. Though Pfizer is a U.S. company, more than 70% of its cash—amounting to more than $35 billion—is sitting overseas. To bring it back home would expose shareholders to the punitive U.S. rate. Instead, Pfizer aims to use some of that cash pile to finance the merger, and Mr. Read also plans to domicile the new combined holding company in the U.K., though its headquarters would remain in New York. Can anyone blame him? We call the U.S. business tax rate "among" the world's highest because, outside of places like North Korea that don't allow private business, it's nearly impossible to find a more punitive rate than the 40% inflicted in the U.S.

Comment: Secret .... corporations are not the ultimate payers of income taxes ... people are.

Apple's "ITax": "[It] isn't alchemy; it's accountancy"

Apple’s Right, Corporate Income Tax Should Be Killed: Pulitzer Prize-Winnng Tax Expert

Excerpt:

Many economists and tax experts, and of course CEOs, have pushed for more drastic change – like eliminating the corporate income tax altogether.

 “I think it would make the system much simpler,” says Pulitzer Prize-winning tax expert David Cay Johnston. He spoke to The Daily Ticker's Aaron Task and Henry Blodget as Cook went head-to-head with Congress.

Johnston says killing the corporate income tax outright would immediately spur growth, investment and hiring. Plus, eliminating the tax would reduce the number of tax loopholes and make a lot of the corporate lobbying in DC moot. One proponent of far-reaching tax reform is Sen. Rand Paul, R-Ky. The anti-tax hawk – and tea party favorite – told the Senate subcommittee to apologize to Cook and Apple executives.

"If anyone should be on trial here it should be Congress ... for creating a bizarre and byzantine tax code," said Paul. "If you want to assign blame, this committee needs to look in the mirror and see who created that mess." That “mess” is still the tax law of the land. If Cook’s reform efforts gain steam, maybe they could call it the iTax.

The Apple Tax Diversion - Senators beat up a U.S. success for following the tax laws they wrote.

Excerpt:

Mr. Levin unveiled the results of his months-long investigation into Apple's corporate taxes and accused the American business success of employing "alchemy" and "gimmickry" to lower its tax bill. What Mr. Levin did not do was present any evidence of anything illegal or even inappropriate. He did prove that Apple has smart accountants and tax lawyers.

Mr. Levin is outraged that Apple subsidiaries in Ireland pay little or no corporate income tax on profits generated from Apple's international sales. Ireland has a laudably low corporate tax rate of 12.5% to attract jobs and capital, but it turns out that for certain corporations controlled by entities outside Ireland, the deal gets better.

The Apple units are based in Ireland, so U.S. law does not consider them to be U.S. corporations subject to U.S. corporate tax. But since they are managed and controlled by Apple in the U.S., Irish law doesn't consider them Irish companies and thus they are also not subject to the 12.5% Irish corporate tax. This isn't alchemy; it's accountancy. 

...... None of this required a Senate "investigation" to discover because Apple is constantly inspected by the IRS and other tax authorities. These tax collectors are well aware of Apple's corporate structure, which has remained essentially the same since 1980. An Apple executive said Tuesday that the company's annual U.S. tax return adds up to a stack of paperwork more than two feet high.

We wonder what the Irish think of the spectacle of an American Senator expressing outrage that an American company doesn't pay enough Irish taxes. As Wisconsin Republican Ron Johnson pointed out on Tuesday, Americans are better off when U.S. companies pay less in taxes to foreign governments.

That includes Americans who are invested in Apple through their mutual and pension funds. And it includes Apple's U.S. workers who benefit when the company is able to sell more iPhones and iPads overseas. Roughly 50,000 of Apple's 75,000 employees are in the U.S.

It's also amazing to behold Democrats who routinely claim that high tax rates don't matter to business behavior denouncing a business for engaging in behavior to avoid paying higher tax rates. Which brings us to the real scandal that Mr. Levin has exposed: the folly of America's corporate tax code.

Comment: The Facts:

• Congress made the tax code complex. It is complex for individuals and it is manyfold more complex for corporations!
• Has Apple broken the law? Nope! They have followed the law and explored all the loopholes available to them. I do that when I pay taxes. I minimize every tax by taking every deduction!
• The complexities introduce many inefficiencies into the economy: Accountants, Auditors, Agents, Lobbyists, et cetera. 
• All corporate income taxes are passed invisibly onto consumers. 

Tax avoidance scheme sounds like menu item at "tony" coffee house

Comment: This is complex and not completely understood by me. Related articles.

• Overseas Profits: When a 95% Tax Cut Doesn't Cut It (specifically mentions “double Irish” and “Dutch sandwich.”)
• WIKI Double Irish arrangement
• Dilbert cartoon strip
• ‘Double Irish With a Dutch Sandwich’ NYTimes graphic
• Google 2.4% Rate Shows How $60 Billion Lost to Tax Loopholes
• How Google's Refusal To Pay US Taxes Means US Taxpayers Fund Its Innovation, Resulting In A Benefit Of $100/Share (Scroll down for Bloomberg graphic)
• Tax avoidance: how big business cuts its bills: Double dips and Dutch sandwiches are two of the many strategies that big companies use to pay less tax
• U.S. Companies Dodge $60 Billion in Taxes With Global Odyssey
• Apple cash staying overseas because of taxes, company says
• Overseas Cash and the Tax Games Multinationals Play
• Companies Push for Tax Break on Foreign Cash
• Top U.S. Firms Are Cash-Rich Abroad, Cash-Poor at Home

Comments:

• I confess ... I don't completely understand how the tax avoidance schemes work. The graphics help.
• It angers me!
• My naive and probably overly simplistic solution .... reduce or eliminiate US corporate income taxes (not property taxes!). My reasoning:
  • All corporate taxes are ultimately paid by the end consumer. These articles suggest that it is more complex than that: Who Pays the Corporate Income Tax? and Who Ultimately Pays the Corporate Income Tax?
  • If there were no corporate income taxes there would be no need to scheme to avoid them

Google’s income shifting

Google 2.4% Rate Shows How $60 Billion Lost to Tax Loopholes

Excerpt:

Google Inc. cut its taxes by $3.1 billion in the last three years using a technique that moves most of its foreign profits through Ireland and the Netherlands to Bermuda.

Google’s income shifting -- involving strategies known to lawyers as the “Double Irish” and the “Dutch Sandwich” -- helped reduce its overseas tax rate to 2.4 percent, the lowest of the top five U.S. technology companies by market capitalization, according to regulatory filings in six countries.

“It’s remarkable that Google’s effective rate is that low,” said Martin A. Sullivan, a tax economist who formerly worked for the U.S. Treasury Department. “We know this company operates throughout the world mostly in high-tax countries where the average corporate rate is well over 20 percent.”

The U.S. corporate income-tax rate is 35 percent. In the U.K., Google’s second-biggest market by revenue, it’s 28 percent.

Google, the owner of the world’s most popular search engine, uses a strategy that has gained favor among such companies as Facebook Inc. and Microsoft Corp. The method takes advantage of Irish tax law to legally shuttle profits into and out of subsidiaries there, largely escaping the country’s 12.5 percent income tax.

See an interactive graphic on Google’s tax strategy

Comment: The simple solution to corporate income taxes is to not tax corporate income at all. Why?

• My views about not taxing corporate profits only pertains to income. Not property taxes. I believe corporations should pay property taxes
  
• This is perhaps not completely intuitive but once someone understands the simplicity of this statement, what follows will be clear! Corporations do not pay income taxes ... people do!
  
• Every expense that a corporation incurs ultimately gets passed onto the consumer! When executives rent a suite at the Superbowl, that expense gets deducted (is there is a business purpose), which is an expense, which reduces profit, which is in essence partially tax-payer funded entertainment
  
• Every consumer item is ladened with taxes paid to state, federal, and local authorities!
  

This helpful article makes the case for the abolishing of the Corporate Income Tax

Abolish Corporate Income Taxes - It hurts the economy more than it collects in revenue, and makes America uncompetitive.

If a corporation will face significantly lower taxes in another location, it will move there. It will also grow and become more profitable, so that it pays a larger total amount in taxes at a lower rate than it had been paying at a higher rate. If the U.S. wants to discourage corporations from leaving the country, it should make its corporate tax structure more appealing by abolishing corporate income taxes entirely.


Why abolish them instead of cutting them? Because then we could get rid of our exceedingly complex corporate tax law. If corporate tax rates were slashed from 35% to 25%, corporations would still have to pay for an army of accountants and lawyers to comply with the tax law and make sure they don't pay any more than required. It's not an easy task to discern what should be "taxable" income for a corporation – especially, what should be a deductible expense. Is interest on debt a legitimate expense? How do you calculate depreciation of assets? Should these vary from industry to industry? What about the CEO's high salary? According to J.Scott Moody, The Joint Committee on Internal Revenue Taxation stated in 1927 that "It must be recognized that while a degree of simplification is possible, a simple income tax for complex business is not."

And that's very true. A "simple" tax code wouldn't take into account certain factors which make it unfair to some. But a complex code just gives creates opportunities for corporations to dodge taxes through myriad breaks and deductions.

The blogger formerly known as Jane Galt wrote in 2002,"The Corporate Income Tax brought in $204.9 billion in 1998. My tax professor (a Democrat) estimated the cost of corporate compliance in that year to be $300 billion. That's just the direct cost -- what corporations paid tax lawyers and accountants." So according to this professor, it cost corporations $500 billion to pay the tax, though the government received barely $200 billion. And the tax code is much larger today than it was in 1998. While the professor's estimate may have been too high, there is undeniably tremendous waste of labor and money that the corporation could have used to grow their business.

Instead of this waste, we could simplify the system by letting the entire tax fall on the shareholders instead. After all, they are already taxed on their dividends, capital gains, and interest from their investments; these are part of their personal income taxes. The entire corporate tax structure does nothing but create a complicated and expensive layer of tax law on top of it on top of what shareholders are already paying in individual income taxes. In other words, when corporations pay taxes, that means less income for its shareholders, which means they effectively paid the tax anyway. Why don't we just have them pay it without the corporate tax rigmarole?

Here's how it could be done. First, tax dividends, capital gains, and interest all at the same flat rate, so that corporations and shareholders wouldn't let taxes affect their decision-making on when to buy or sell stock or pay dividends. Second, devise a system similar to employer withholding of the income tax on wages, applying it to the paying of dividends. This ensures that foreign investors have also paid the tax, and it deters tax evasion. Third, for the same reasons, devise if possible similar withholding taxes for interest income and long-term capital gains, making sure they are indexed for inflation.

By replacing an army of high-priced lawyers and accountants with a few clerks to handle tax withholding for dividend checks, Corporate America will save hundreds of billions of dollars – money with which they can expand their business and provide jobs, lower prices, or return to shareholders, where the money will be taxed. It will also lower the cost of production, making American goods more competitive overseas.

Skybox Subsidies

Throw Out Skybox Tax Subsidies

Excerpt:

UNTIL the 1970s, Major League Baseball was a populist sport. Bleacher seats cost as little as a dollar, meaning middle- or even working-class fans could afford to take their families to a game a few times each season.

But in the years since, tickets to baseball games — along with other professional sports events — have skyrocketed in cost. Over the last two decades, the average ticket price for a Chicago Cubs game has increased 265 percent, more than four times the inflation rate. Add in parking, concessions and souvenirs, and a family trip to one of this week’s opening day games could easily cost a few hundred dollars.

There are many reasons for the price explosion, but a critical factor has been the ability of businesses to write off tickets as entertainment expenses — essentially a huge, and wholly unnecessary, government subsidy.

These deductions have led to higher ticket prices in two ways. On the demand side, they have fueled competition for scarce seats, with business taxpayers bidding in part with dollars they save through the deductions.

On the supply side, the large number of businesses bidding for expensive seats has driven the expansion of luxury skyboxes and a reduction in overall seats in new ballparks.

While baseball parks built in the 1960s and before held as many as 56,000 seats, the modern trend is toward smaller-capacity parks, with a higher percentage of total space dedicated to skyboxes. The new Yankee Stadium, the only major-league park built since 2000 with more than 44,000 seats, has 3,000 fewer seats than its 1923 predecessor but almost three times as many skybox suites.

Congress has occasionally expressed concern about deductions for business entertainment, including tickets to sporting events. In 1962, it placed limits on the deductibility of business entertainment generally. In 1986 it restricted the deductibility of luxury skybox tickets to the face value of non-luxury premium tickets, like center-court seats at a basketball game or behind-the-plate seats at a baseball game. For example, if a ticket to a skybox suite cost $500 and a seat behind the plate cost $100, a business could deduct only $100, subject to other limitations on deductibility.

Comment: When I was a kid we would go to Crosley Field in Cincy. The right field bleachers (called the "Sun Deck" during the day and "Moon Deck" at night was $ 1.

A tax break for Tinseltown

Raiders of the Lost Taxpayer

Excerpt:

National Journal reported this week that the Senate's economic stimulus bill includes a provision that would make Hollywood studios eligible for a special 50% write-off of equipment purchases. According to the report, "the provision is backed by firms like the Walt Disney Co., and the industry trade group the Motion Picture Association of America."

The House version of the stimulus already includes a bonus depreciation that lets businesses immediately write off 50% of their 2009 capital expenditures. But the Senate bill expands the definition of "qualifying property" -- specifically to include "certain motion picture film or videotape." Hollywood moguls like Steven Spielberg, David Geffen and George Lucas were among the biggest backers of President Obama's candidacy, and it looks as though Democrats have found a way to return the favor.

Comment: Change we can believe in?

Cut corporate taxes to zero

Leave the New Deal in the History Books - Cut corporate taxes to zero and create real jobs.

Excerpt:

The quickest way to strengthen the credit system and begin the end of this crisis is to get money into the economy for true job creation, and not into government work programs. The way to do this is to slash taxes. The U.S. corporate tax rate, currently the highest in the world, should be cut to 0% (corporate income would still be taxed, of course, when distributed to shareholders as dividends). The capital-gains tax should be cut further.

The positive impact on corporate-credit markets, the stock market, the attractiveness of the U.S. to foreign investors, and the willingness to take business risk and create new jobs would be immediate. Capital-gains tax collections would rise. Capital flows would be in the hands of those who are driven to build businesses and permanent jobs efficiently instead of pushing that capital through a government pipeline with endless amounts of friction. If the U.S. is to lead the international economic community out of this crisis, this is the place to start.

Comment: Won't happen because it would be very politically unpopular. The populace does not understand that Corporate taxes just get hidden in every product or service we buy! Corporate taxes just encourage tax havens!

Wells Fargo didn't pay anything for Wachovia

Why Wells Fargo Really Wanted Wachovia

Excerpt:

Why was Wells Fargo so eager to ante up a deal that was leaps and bounds sweeter than Citi was willing to pay? After all, Wells Fargo has a stellar reputation of keeping underwriting standards in check, so why would it want anything to do with a shoddy bank drowning in subprime mortgages?

Taxes. It was all about the taxes.

The day after Citigroup made its bid, the Treasury changed a tax rule that lets banks accelerate the losses and writedowns on banks they acquire against their own net income, offsetting the charges as tax write-offs.

Wells plans on writing off some $74 billion of Wachovia's $498 billion loan portfolio -- an insanely large amount that reflects just how poisoned Wachovia's books really were. With the new tax rules, it gets to use all of that $74 billion as a charge against its own net income, which means one thing: Wells Fargo's going to be a tax-write-off machine for years to come.

Just how much will it save? The Wall Street Journal, citing an independent tax analyst, estimates Wells Fargo could reap a tax savings of about $19.4 billion. To put that in perspective, the 0.1991 shares of its own stock Wells Fargo is offering Wachovia comes out to around $6.24 per share, or roughly $13.8 billion. Yes, Wells Fargo gets a $19.4 billion tax break for a company it'll pay just under $14 billion for (if the deal closed today).

In other words, Wells Fargo didn't pay anything for Wachovia: The IRS paid it more than $5 billion to take it. Who ever said you have to fear the taxman?

A couple implications of this: One, it's a good thing that at least some benefits are granted to companies willing to buy failed banks. After all, had Wells Fargo not stepped up to the plate, the existing deal with Citigroup could have stuck taxpayers with tens of billions of dollars in losses.

Comment: Interesting Perspective