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