A Deeper Look at U.S. Corporate Taxation

Richard Salsman, President and Chief Market Strategist at InterMarket Forecasting Inc., recently published a note to clients, "The Disproportionate Burden of U.S. Corporate Taxation", which he has generously shared below for readers of this blog.

Salsman discusses many of the problems with the current U.S. corporate tax code.

The biggest problem is the fact that the statutory U.S. corporate tax rate, 39%, is THE highest among OECD countries. Critics of those who advocate a lower statutory rate often cite the lower effective U.S. corporate tax rate, noting that most corporations don't pay anywhere near the 39% rate.

While that is true, as the statutory rate goes higher corporations turn to lobbyists to pressure politicians to implement all manner of tax loopholes, carve-outs and exemptions that greatly distort the tax code.

When this happens, capital is directed to activities that might never be pursued absent the favorable tax treatment. Capital is scarce and the more of it that is directed to purposes preferred by the political class, the less that is available for intrepid entrepreneurs looking to fund exciting new business endeavors.

Another huge problem is that the U.S. is one of the few countries that taxes corporate income on a global basis, versus the territorial system utilized by most other counties. As Salsman notes, this is a system that incentivizes companies to keep their profits abroad to avoid repatriating them. Once repatriated, the profits are then taxed at a higher rate. This is what encourages U.S.-based companies to consider entering into a business transaction with a foreign-based company via an inversion. The result is a change of corporate domicile to a lower tax country. John Tamny also discussed inversions in a recent article at Forbes Opinion.

A solution to this madness?

The political corruption via lobbying that the present corporate tax code encourages, coupled with high compliance costs and the fact that corporate taxes raise a relatively trivial amount of revenue for the central government, strongly suggests the optimal U.S. corporate tax rate is zero.

The Capitalist Advisor 
April 14, 2016

Over-regulated!

As if the U.S. economy was not struggling hard enough today with unsound money, excessive taxation and hostility to free and open foreign trade, now comes word that the Obama Administration plans to saddle us with even more useless, burdensome regulations.

Unfortunately, too many people quite simply don't trust the incredible power of the free market to police itself. Businesses are always portrayed as predatory, corner-cutting, polluting...pick your favorite stereotype. Customers/clients are always being taken advantage of, overcharged, or physically harmed. Employees are always getting the shaft in terms of working conditions, benefits, or pay.

All of this in the pursuit of that ugly concept called generating profits. Often referred to by the left as "obscene profits."

That businesses operating in a market economy (even one as far from "free" as the U.S. economy is) cannot survive very long treating customers poorly or attract talent if employees are not treated well is completely lost on the politicians and bureaucrats who hand down onerous rules from on high.

Caroline Baum outlines some of the growth-retarding initiatives in the works in a recent Economics21.org article. Added to the incredible amount of harmful regulations passed in recent years by the alphabet-soup of federal regulatory agencies, is it any wonder the U.S. economy can only muster real growth at a pathetic 2%-3% annual rate?

Obama's Costly End-Run on Regulations
By Caroline Baum
April 19, 2016

President Barack Obama may have already checked out of the White House, figuratively speaking, but he is still very much engaged when it comes to his legacy. That's why he wants to leave us with an array of growth-sapping rules and regulations before he leaves office. 

"Obama Readies Flurry of Regulations" read the April 7 headline in the Wall Street Journal. After lowering the boom on corporate tax inversions and imposing new rules on retirement brokers, the Obama administration is looking to implement regulations that will affect "broad swaths of the economy," including labor, health, finance and the environment, the Journal reported. 

For example, Obama has proposed doubling the salary threshold - from $24,000 to $50,000 - that determines eligibility for overtime pay. A good deal for workers, right? Only for those who aren't downgraded from salaried to hourly workers. 

Obama and his minions fail to grasp the depressing effect such rules will have on employers and on business activity in general. Those who provide goods and services to consumers are not passive participants in the government's regulatory schemes. They are active, profit-maximizing agents. 

As a general rule, liberals tend to ignore the economy's supply side. They seem to think constraints placed on business will have no effect on decisions about investment, hiring and compensation. They never consider the unintended consequences of government-imposed rules. Good intentions - higher pay, expanded job opportunities - are no guarantee of good results. 

The New York Times editorial board was positively gleeful over the Labor Department's proposed new rule for retirement brokers. In an attempt to encourage the industry to adopt the practice of charging up-front fees instead of commissions, the rule would impose a "fiduciary standard" on commissioned brokers. That means signing a contract stating that they are acting in the best interest of their client, along with other disclosures (think lawsuits). A good deal for small savers? Only if you consider reduced access to affordable investment advice, services and products, along with potential higher costs and lower returns, to be a plus. 

Perhaps you have heard of the "Paycheck Fairness Act," a feminist preoccupation that has languished in Congress for two decades. Obama has decided to apply his governing credo - "If Congress won't act, I will" - to achieve a back-door solution by "manipulating the obscure Paperwork Reduction Act for its exact opposite purpose," said Diana Furchtgott-Roth, director of Economics21 at the Manhattan Institute, in a Wall Street Journal op-ed last week. 

The Equal Employment Opportunity Commission is planning to expand the number of data points from 140 to 3,360 on an employer form required of companies with more than 100 workers, according to Furchtgott-Roth. The annual cost of complying with these and additional burdens is $10 million (EEOC estimate) or $693 million (Chamber of Commerce estimate), which businesses will pass along to consumers in the form of higher prices. Don't forget the "avalanche of lawsuits and investigations" for presumed discrimination, Furchtgott-Roth said. A good deal for women? Only if companies aren't deterred from hiring in general and hiring women in particular. 

The supply side of the economy is a big mystery to Obama, who managed to spend 12 years as a lecturer at the University of Chicago Law School without absorbing any of the "Chicago School" ethos. And he fails to understand why a carrot is often more effective than a stick when it comes to achieving desired results. 

Take the Treasury's new, expanded rules to prevent U.S. companies from incorporating overseas, a process known as inversion. U.S. companies aren't clamoring to leave the U.S. for business-conduct purposes. The cost of staying in the U.S. puts them at a competitive disadvantage because the U.S.corporate tax rate, at 35 percent, is the highest among developed nations. Its worldwide tax system, abandoned by most developed nations in favor of a territorial system, is another disincentive to remaining in the U.S.Think how much simpler, and efficient, it would be to dangle a carrot in front of business instead. Reduce the corporate tax rate to 25%, in line with the developed-world average. U.S. companies would choose to remain in the United States, invest and create jobs at home, and pay taxes in the United States. Instead, the Treasury is determined to punish companies seeking to increase profitability for shareholders. 

Liberals may harbor an instinctive aversion to any phrase that contains the words "supply side." After all, supply-side economics - better known as trickle-down economics or tax cuts for the rich - has become a pejorative. 

It just so happens that the nation's future depends on supply-side initiatives. "Secular stagnation," a concept revived by Harvard's Larry Summers in 2013 to explain today's slow-growth economy, is a supply-side phenomenon coined by another Harvard economist, Alvin Hansen, in the 1930s. Seeking to explain why the Great Depression lasted so long, Hansen adopted the phrase secular stagnation. He said that all the ingredients for economic growth - technological innovation, population growth and territorial expansion - had been exhausted. 

All three are supply-side phenomenon. Yet Hansen's proposed solution was cyclical: constant deficit spending by the government. 

Hansen was wrong in his determination that everything that could be invented had been invented by the 1930s. The post-war baby boom, and mass influx of women into labor force starting in the late 1960s, provided the other catalyst for potential growth. 

Like Hansen, Summers sees government spending, or "infrastructure investment," as the way out of today's slow-growth quagmire. But secular problems need secular solutions. Skills-based immigration reform would augment slow growth in the U.S. labor force. A friendlier corporate tax structure would encourage domestic investment. A reduction in red tape would stimulate entrepreneurship and new business formation, the true engine of job creation. 

What about the technological innovation, which holds the key to faster productivity growth? On that score, I'll defer to Melanie Griffith's character in the movie, 'Working Girl," who said it best: "You never know where the next big idea might come from."