One issue which has actually received a reasonable amount of attention during the current presidential campaign is the tax structure applicable to corporations. Even so, much of the discussion has been at a simplistic level; a more comprehensive review is needed.
There are four keys to the current tax structure that need to be addressed:
1) The rate for taxation on corporate income is 35%. This is the second highest rate in the world.
2) A huge chunk of taxation on privately held corporations is paid through the personal income tax. Corporations that are either Subchapter S entities or LLC's pay no separate corporate income tax; their profits are included on the tax returns of their shareholders.
3) Income earned by American corporations outside of the USA is not taxed unless and until the income is brought back into the country. This has led to American corporations holding that income in foreign lands and reinvesting it there, thereby avoiding the 35% tax.
4) The corporate tax structure is riddled with special exemptions, deductions, credits and other provisions which make the tax code into a maze and which also results in better treatment for firms with the most successful lobbyists.
These key provisions place the USA at a competitive disadvantage compared to other industrial nations. There are a myriad of relevant points here, but consider these:
1) The funds held overseas by American corporations total well over a trillion dollars with some estimating the number to be close to two trillion dollars. All of these funds could be invested into the American economy, but the tax code provides a major disincentive for doing so. Few companies want to bring cash home for investment only to pay out 35% in taxes.
2) The confusion of the tax code requires American companies to spend enormous amounts just to comply with its requirements. These are wasted expenditures; nothing is produced as a result. Also, this same confusion discourages foreign investment in the USA since the tax treatment for the investments is sometimes open to debate.
3) Manufacturers located abroad are given a competitive advantage over American manufacturers since only the domestic firms have to comply with the tax code. Think of it this way: if a manufacturer in Korea makes a product identical to one made in the USA and for the same cost, both the Korean and the American company make the same profit. The American company, however, has to pay 35% of the profit to the US government while the Korean does not, so the tax code results in the Korean having a net profit which is 50% higher than that of the American firm.
4) Changes to the personal tax code often have major impact on the corporate world. The current debate about raising the tax rate for the so-called 1% is actually a debate to a great extent about raising taxes on privately held companies that pay taxes through their shareholders. The result is that arguments about class status and fair shares end up affecting the most productive segment of the economy in a major way.
5) Some companies manage through some means to avoid all taxes. The best example is General Electric. This industrial giant earned billions of dollars last year but paid no taxes. Particularly since the chairman of GE is one of Obama's cronies, this treatment gives rise to the clear perception that the code is unfair and rewards "friends" of Obama.
So how can these problems be addressed? The candidates have offered various solutions.
1) Funds Held Overseas -- All candidates have addressed what should be done with regard to the one to two trillion dollars now held by corporations overseas. There is a clear difference between the parties on this point. President Obama wants to impose a tax on these funds immediately; his latest proposal is for a 30% tax on the accumulated funds held outside of the country. It is not clear if he wants to also continue the 35% tax on repatriation. The tax, however, would give the government a big boost in revenue. There would be no effect on economic growth. Republican proposals all center on waiving all or most of the tax on the funds provided they were brought back to the USA. Some candidates have also placed requirements on how those funds need to be used. The idea here is that a greatly reduced tax (say 5% instead of 35%) would lure the bulk of the funds back to the USA. When these funds then get pumped into the American economy, they would provide a private sector boost larger than Obama's stimulus, and they would increase the growth rate of the economy by two to three percent.
2) The confusion of the code and the unfairness of special provisions could be eliminated by dropping all the special provisions and using a greatly reduced tax rate. Instead of some companies paying 35% and others like Obama's friends at GE paying nothing, everyone could pay 12% or even a lower rate. Billions would be saved with the reduced cost of compliance with the tax code. Distortions in the economy due to tax structures would be eliminated. Claims of unfairness could also be removed. Changes of this sort have been proposed by the Republicans, but not by Obama.
3) The effect of personal tax rate changes on the economy could also be reduced by ending the ability for companies to pay taxes through the personal returns of the shareholders. If the corporate tax rate were 12%, there would be no need for Subchapter S. Indeed, the code could be modified so that partnerships and LLC's above a certain size (like $5 million in revenues) could be required to pay tax as if they were corporations.
4) Earlier in the campaign, the 9-9-9 plan of Herman Cain introduced a consumption tax which had the effect, in part, of supporting American manufacturing. Taxes were levied on the sale of products whether domestic or imported, so the distortion of the corporate income tax was nearly eliminated. None of the current candidates has endorsed a consumption tax. Rick Santorum has called for elimination of all tax on manufacturing. While this would support the US economy, it would also continue different treatment for different groups. Romney has just promoted lower overall rated to reduce the advantage for foreign manufacturers. Obama has proposed a slight reduction in the corporate rate, but, when coupled with the new taxation on foreign operations, Obama is actually looking to increase total taxation on American businesses.
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