Sunday, March 4, 2012

Lower corporate tax rate really a tax hike

Knoxville News-Sentinel
Posted March 3, 2012 at 4 p.m.

Question: When is a tax decrease a tax increase?

I used to ask students "What is the purpose of the internal revenue code?" Students being naive would answer "To collect taxes." Of course if that were the case then the tax code would be one sentence (all income will be taxed at 18 percent) rather than 75,000 pages.

The purpose of the tax code is to reward some while punishing others. The poster child illustrating this point is not Warren Buffett but rather Jeffrey Immelt's company, General Electric. A report from Citizens for Tax Justice finds that GE for the years 2008-2010 had an effective tax rate of -45.3 percent even though it earned a profit of $10 billion.

Over that period 30 profitable corporations paid no federal income taxes and received rebate checks from the Treasury of $21.8 billion. Personally I don't feel outrage at those firms — only envy.

Obama's lowering of the corporate tax rate is really a tax increase. While most of the media has reported that the projected increase stems from imposing a minimum tax on offshore earnings of American corporations, this actually is not the case.

In reality the likelihood is that the imposition of a minimum tax on offshore earnings will result in a reduction of tax revenues. The proposal closes loopholes (for example on oil and gas — not an Obama favorite) yet keeps loopholes for manufacturing and "renewable" energy (an Obama favorite).

Citizens for Tax Justice report that 70 percent of U.S. corporations they surveyed paid an effective tax rate of 17 percent or less over 2008-2010. What is interesting is that many companies in industries that have fewer loopholes and must pay higher taxes have been moving their headquarters out of the country. Tyco (health care) moved to Bermuda and health care pays the highest effective rate at 30 percent.

Also companies that earn most of their revenue outside the country like Foster Wheeler have relocated instead of being subjected to double taxation — paying taxes abroad and then having to pay U.S. taxes. With fewer loopholes, Harold Black's first law ("Any law worth circumventing will be") will still hold. The only question is how? The result may be that more firms will relocate their headquarters out of the country, lowering tax revenues.

Recall that companies located their credit card businesses in no rate cap South Dakota and Delaware in the face of state ceilings on consumer interest rates. Corporations moved to business-friendly Delaware.

It has been reported that more than 50 percent of the profits of U.S. corporations come from abroad. So if Obama's proposal were somehow enacted, the 70 percent of the firms who would have to pay a higher rate and those firms with a large percentage of foreign sales will both have an incentive to move out of the country.

Apparently no one in this administration has heard of the law of unintended consequences.

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John in Ky said...

honestly.. if you remove the lip service Obama gives to different issues and only look at what his actions eventually are... not so sure that it is unintentional... he is a VERY smart man. you don't have dummies running the Harvard Law Review.

My saying is that i would rather have an honest man who is of average intelligence be Prez than a dishonest genius... this was from before Obama.. it was during the Perot days.

H.A. Black said...

Amen to that. As I said before, arguably the two smartest presidents have been the two worst - Barack Obama and Jimmy Carter.