Eliminate The Corporate Tax Rate?

I just looked at my statistics for my blog. I had 4,400 folks look at my blog over the last year, which I am pleased with. However, the one statistic that really amazed me was the number of countries my readers represent. I have had people from 88 countries throughout the world read my blog. I am humbled and thankful that so many people have read my blog. I have two goals for next year in relation to my blog. I want to increase my readership, and I want to increase my number of countries. I plan on reading Paul Sohn’s ebook on how to increase your blog readership. I will also read other recommendations to increase the reach of “It’s Business and Personal.”

What I want to address today is the topic of a Corporate Tax rate. I just read an article that discussed ten reasons for eliminating taxes on corporate taxes. When I first saw the title I immediately thought, or great another greedy person who is looking for the government to give them more advantage with the promise of better economic growth for all, but never seeing the promise emerge, but when I actually read the article I now find myself agreeing, but with a qualifier which I will discuss shortly.

John Steele Gordon, an author, wrote a commentary today in the WSJ giving the top ten reasons to abolish the corporate income tax. He argues that with a tax rate of 35%, the highest in the world, the United States is actually hurting missing an opportunity that could be gained if the tax was eliminated. I was skeptical until I read his argument.

I think any of us that pay attention to tax revenues and deficits recognizes the complexity of our current system. Within our system there is a huge need for tax preparers and consultants that help people, an corporations find the loopholes. Gordon argues that if we eliminate the corporate tax, the consultants, lobbyists, go away, and I can see the benefit of that and the opportunity to have an incredible amount of money that could be used for other things.

The second reason given by Gordon is connected to the first. Management is focused on profit. If they are good managers they will be looking at a multilayered income statement that will help them focus their efforts on controlling costs. Gordon states that managers focus on after tax profits, and rely heavily on consultants to minimize taxes and increase after tax profits. I would hope that these managers would not just focus there, but earnings after tax is important. With the elimination of the corporate tax that effort is replaced with a focus on the actual creation of wealth, which is not a bad idea.

Currently, taxpayers are hit by two different tax rates. One is related to wages and the other capital gains. Long-term capital gains, stocks held longer than 61 days, are taxed at a 15% rate, whereas short-term capital gains are considered income that is taxed at a higher rate depending on how much money you make. By eliminating the corporate tax rate “there is no reason to tax dividends at the lower level.” Which means more revenue for the government.

Another by-product of this elimination would be increased profits that could be shared with investors and other stakeholders. With increased income more investment could occur thus increasing capital budgeting for most companies. More investment means greater growth in the GDP. Greater growth in GDP means great income for people that means a greater tax foundation which means more state revenue. More state revenue means stronger social programs. Hmm, seems like everyone wins.

Another outcome, according to Gordon, is increased stock prices. This in turn leads to larger 401(k)s, meaning better retire accounts, thus creating the wealth effect leading to more consumption. This means a stronger economy, which means higher tax revenue, which means more cash for social programs.

Gordon’s sixth reason is very interesting to me, especially in light of my thoughts about social entrepreneurship being the new model for meeting social need. Gordon states, “the distinction between for-profit and nonprofit corporations would disappear. So nonprofit corporations would not have to jump through hoops to qualify for that status.” Anyone who has been through that process knows how difficult it can be. This reason does intrigue me.

Gordon’s seventh reason also seems compelling. This reason involves the $2 Trillion that is sitting offshore to escape taxes. With the tax requirement eliminated this cash could be moved to the United States increasing our liquid capital. Hmm, money in our checking account.

One of the reasons for US company inversion is to escape the tax rate. If the rate is eliminated there is no reason to go elsewhere. In fact, with the reduced cost of business, and our trained workforce, many foreign companies may choose to relocate here. This is another really good point. A related point involves competition. Foreign countries would be forced to reduce their rates also, which would help the world economy. Hmm, very interesting.

Gordon’s tenth reason involves the elimination of crony capitalism. If the corporate tax rate is eliminated then there is no reason for politicians to dole out favors for money. The favors are usually tax breaks for corporations. This could also include subsidies, etc. All of this would go away, at least in the mind of Gordon.

The argument Gordon presents is, at least to me compelling and interesting, but it is a long way from implementation. I can think of several problems that could occur because the new system would be too simple. Lobbyists, and other consultants, maybe even tax preparers may see it as a threat. Therefore they will fight this type of change. Or, maybe corporations would view this as a loss of power. Thus seeing power as a competitive advantage. They might feel threatened by a level playing field. However, I also believe in the fallen nature of man and our ability to mess things up. I also think this would work better if we went to a flat tax rate. I do think the elimination of tax loopholes and the implementation of a flat rate would be a win win for all.

And that is my thought for the day!

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