So a while back someone close to me read an article in the local paper. The gist of the article was that corporate taxes create jobs. When she told me this, I hesitated to respond because the premise was, for lack of better definition, stupid. Trying to put it in context, I asked her a simple question:
After paying your taxes, do you have more or less money to spend?
I believe corporate taxes are reasonable, providing they don't harm commerce. I'm thinking 15% at most. Your thoughts?
I think there is no best or ideal tax rate and seen through the lens of the question you posed to your friend, nobody in their right mind ascribes to the notion of "why pay less when one can pay more?"
On the matter of federal income taxation of business (specifically corporate) profits, the U.S.' tax code is inefficient and inequitable. The problem isn't the rates of taxation, but rather that the tax code is used not only to produce revenue for the government, but also as a tool for encouraging or discouraging social and economic behavior. On a tactical level, the morass of deductions, exclusions, rules, and exceptions to the rules creates a situation whereby corporations, to minimize their tax burden, undertake behaviors that are just absurd.
For example, absent the current convolutions of the U.S. tax code:
- The convoluted ownership and parent-subsidiary organizational structures that all large companies have would not exist.
- Businesses would have no need for a cadre of tax attorneys and tax accountants who pour over the tax code to find ways to avail companies of ways to minimize their tax liability by doing things such as forming an entity that holds cash revenue in lower tax-rate jurisdictions.
- Determining what be an equitable and effective tax rate would be comparatively easy to determine -- it's the rate that, from corporations, generates enough income for governments to do the things it is tasked with doing and that also doesn't consume so much business profit that it materially dissuades businesses from forming and/or doing business in the U.S.
The solution to the problem is to redesign the tax code so that effective tax rates and marginal tax rates are the same and yield the same quantity of tax revenue. The way to achieve that is not by adjusting the rates, but rather by aligning the definition of "taxable income" with the definition of "net income" as reported in a company's 10-K or, in the case of pass-through organizations, audited financial statements. As goes corporate/business taxation, one will observe that on their statement of income (
i.e, tax returns) submitted to the IRS, a business may report that it earned, say, $80M. On the statement of income companies provide to stockholders, (potential) investors, creditors, etc., the exact same company for the exact same calendar period will attest to having earned vastly more, indeed the difference between reported tax income and reported business income is in some instances billions.
IMO, the solution, with regard to corporate taxation is as follows:
- Discard the entirety of the current tax code.
- Define graduated income ranges. Make the ranges as large or small as seems reasonable. There is no reason there cannot be several hundred or or even a thousand income ranges.
- Assign an income tax rate to each income range.
- Stipulate that federal income tax liability is the liability of the parent company. That is to say, the income figures reported in an organization's consolidated statement of income (10-K) is the figure multiplied by the tax rate corresponding to the company's income range.
- The sum could be net income, EBIT, EBITDA, net revenue, gross margin or some other sum. The viability of solution doesn't depend on what sum is chosen. It depends on there being congruity between the sum reported for financial reporting and the one upon which taxes are paid.
- Stipulate that the product of the math operation in step 4 is the corporation's tax liability.
As go the tax rates under such a model, well, I suspect rates ranging between five percent and 15 percent would be fine. Thus, lets say that there are 250 explicit corporate income ranges defined. Insofar as there are 250 income ranges, the range of tax rates needs to be apportioned over those 250 ranges. That's easy to do: .10 ÷ 250 = 0.0004; therefore the different between the taxes paid in one bracket and the next will differ by 4/10,000ths of a point.
Now that may seem absurd give that we like "easy" numbers, but the reality is that every corporation owns or has access to a calculator that can multiply whatever be their income by a decimal having any quantity of significant digits. The IRS will publish the income range-tax-rate tables. Corporations need only find their income figure in the table, multiply it by the decimal shown for that rate, write a check in the amount of the product, and mail the check to the IRS.
What does that do to the IRS/Dept. of Treasury (DOTS)? Well, it gets rid of or shifts the role of a lot of IRS employees in that the compliance activities of the IRS will be greatly simplified and reduced in quantity because the figures that corporations report to present their operations/profitability in a positive a light so they can attract investors and secure credit are the same figures upon which the undesirable task of calculating tax liability would be calculated. The DOTS will surely need less money to perform its duty re: tax collection. How the DOTS/Congress opts to us the savings is anyone's guess.
