The Simplistic Idiocy Of The Tax Debate

Who pays the corporate income tax?  The correct answer is some corporations who haven't had good lobbyists in the past.  The follow up question, however, is "who REALLY pays the corporate income tax?"  There, the correct answer is the American people.

When the ABC, Inc. makes a product in Wisconsin and then sells it in Minnesota, it makes a profit (hopefully).  That profit comes from the amount paid by the ultimate buyer.  Let's give these transaction number values.  ABC makes a hammer at a cost of $4.00 in Wisconsin.  It sells the hammer to a homeowner in Minnesota for $7.00, with the result being that there is a $3.00 profit.  That three dollar profit came directly from the consumer.  ABC pays 35% of that profit to the federal government which leave ABC with a roughly $2.00 profit and the federal government with on dollar of tax.

Now let's suppose that ABC decides to move its hammer plant to Mexico.  It now costs ABC $2.00 to make the hammer and $1.00 to ship that hammer to Minnesota for sale.  ABC, however, sets up a separate company that buys the hammer from ABC in Mexico for $6.75 and resells it to the consumer in Minnesota for $7.00.  The profit ABC earns in Mexico ($6.75 less $3.00 or 3.75) is not taxed by the USA unless ABC brings the cash back to this country.  The Mexican tax is 22%, so ABC pays Mexico about 80 cents in taxes unless it can make a deal with the government to pay less (which is not difficult to do).  The US government gets about 8 cents in revenue; Mexico gets at most 80 cents; and ABC keeps $2.87 instead of the $2.00 it kept when it made the hammer in Wisconsin.  All of these taxes are still paid by the ultimate buyer, an American consumer.

Right now in Washington, there is discussion of replacing the corporate income tax of 35% with a 20% tax rate, with no exclusions or loopholes and also with a border tax adjustment.  That adjustment means that products exported from the USA are not counted when the tax is computed while products imported to the USA are hit with the full tax.  Let's look at the examples to see how that works.  For the hammer made in Wisconsin and sold in Minnesota, the tax paid falls to 60 cents (20% of $3.00).  For the hammer made in Mexico, the tax would be 80 cents because the profit is $4.00 instead of just $3.00.  For both, though, that tax is still paid by the consumer.

The revised tax takes in more money, however, than expected because all the loopholes, special deals and tax breaks are erased.  A company like General Electric which doesn't pay US taxes because of all its special loopholes will start paying billions.

The big cry against the border adjustment tax is a phony one.  It is the claim that the tax would fall on the average American.  That's nonsense.  The average American always has and always will ultimately pay the corporate income tax.  Nothing will change in that regard with the border adjustment.  What will change is that the foreign manufacturers who avoid American taxes will no longer get a benefit bestowed upon them by the US government.  In other words, when Toyota makes cars in Japan and ships them to the USA, it will no longer get to sell those vehicles for less because it pays no (or a small) corporate tax on them.  There is no reason why a car made by Toyota in Japan should avoid the tax while a car made by Ford in Michigan should get hit with the full tax.  Why should the USA penalize companies that manufacture in the USA?  It makes no sense.

There will inevitably be some price increases if the tax law is changed to include a border adjustment.  If Walmart buys shirts made in China for a low price and sells them in the USA, that price will rise once the border adjustment tax is added into the cost structure.  Some people will have to pay more for there shirts.  Meanwhile, however, millions of other Americans will get jobs at companies that again can compete while making products in the USA.  Our economy will grow much more quickly and the incomes of all Americans will rise as a result.  Without a doubt, the overall impact on the economy will be highly beneficial for the country as a whole.

There is no way to modify the tax structure of the country without there being winners and losers.  The point is that the country as a whole has to be the winner for the change to make sense.  A border adjustment clearly falls within that category.  The politicians who whine that some people may lose due to the change don't seem to get that basic truth.