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Appropriate Corporate Tax Obligations

It’s no secret that the cause de jour lately in Obamatown has been deficit deduction, or at least paying lip service to deficit reduction. Whether it is discussions on raising the debt ceiling or lowering unemployment, reining in runaway spending seems the cure for many federal maladies. The link between the lack of jobs and the deficit is clear, who wants to expand their business and hire more people if your tax liabilities are onerous, the bureaucratic regulations keep you hobbled and the uncertainties of both getting worse increase with each passing day as government keeps kicking that can down the road.

It is interesting to see how each state has attempted to tackle both their deficit spending and their unemployment problem. The great(?) state of California has it worse then most. If the national unemployment rate is roughly 9%, ours is 11.9%, and why is it higher then the national average, here is one answer:

California currently ranks #49 among U.S. states for “business tax climate” (Tax Foundation) and #48 for for “economic freedom” (Mercatus). It shouldn’t be any surprise then that companies are leaving the “Golden State” in record numbers this year (see chart above) for “golder pastures” and more business-friendly climates in other states.

You would think that businesses would be flocking here, perfect climate, abundant food and resources, cutting edge technology, proximity to the Far East, and myriad leisure activities to satisfy even the most finicky of clients. It would take something pretty cataclysmic to chase away all these businesses (and in the process skyrocket the unemployment rate) stifling taxation and regulation will do that, see, the bottom line is profits and if you can make more money in another state (increasing that state’s coffers with your tax dollars and increasing that states job markets), moving is elementary.

The capital directed to out-of-state or out-of-country, while difficult to calculate, is nonetheless in the billions of dollars. The top five destinations are (1) Texas, (2) Arizona, (3) Colorado, (4) Nevada and Utah tied; and (5) Virginia and North Carolina tied.

If we look at the tax date chart, we can see why. Further below in the chart you can see how the individual states stack up against foreign countries again, we hobble ourselves needlessly.

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If we look at the above chart we can see that although our personal tax rate is moderate compared with the rest of the world, our corporate tax rate dwarfs all others except for Japan.

I am willing to concede that lowering the personal tax brackets does nothing for job creation, Bush and Obama proved that (although, to be fair, when in the throws of a recession as both were, income tax rates no matter where they are is insufficient for this) but what about corporate taxation? How many decades have we seen Japan’s inability to get out of it’s own way in growing it’s economy, think that high corporate tax rate has anything to do with that?

Obama has flirted with this idea and Ryan’s plan has this as part of it’s tax strategy, if the individual states can show a correlation between the corporate tax rate and productivity, maybe Washington should pay attention.

9 comments

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  1. CM says:

    Some brief comments:

    1. As outlined in an earlier thread, it sounds like Obama is looking to make drastic cuts to the federal direct corporate tax rate. However there will be other changes so that overall it will be revenue-neutral. If large corporations actually paid their taxes in the United States (which may be what he’s aiming for, I don’t know) then in theory that should relieve some of the burden on smaller businesses. I.e. small businesses are having to unfairly subsidise larger companies at present.

    2. I also questioned the significance of just looking at the federal direct corporate tax rate as opposed to the total tax picture (indirect taxes, or incentives and disincentives can make quite a difference). That requires more than just adding the federal and state direct rates. We both pointed to studies in that thread, however the reporting of one of the studies appeared to be quite inaccurate. However in this ‘Business Tax Climate‘ assessment The Tax Foundation do seem to have included all the other relevant bits and pieces.

    3. As a ‘middle-manager’ for a while in a small company (and probably a part-owner very soon) I’m certainly an advocate of low business taxes from a personal standpoint. However I also agree intellectually that lower corporate taxes are important to help business survive and prosper. I also completely agree that there needs to be regulatory stability and confidence.

    4. Given the costs of moving (and it may be lower costs for a smaller business, but proportionally it can still be just as bad or even worse for them), there must be a clear and obvious financial benefit for a company to relocate to the different state (or country). North Carolina and Arizona (fifth equal and second) don’t seem all that different from California, so it’s difficult to see tax rates as a primary motive to move to those states especially if new employees are required. I see Vranich acknowledges that “no one knows the real level of activity because smaller companies are not required to file layoff notices with the state”. However I think it would be dangerous for states to give too much weighting to the tax situations in other states. That’s not saying it’s not a relevant factor, but I think there is a possible danger of engaging in a ‘race to the bottom’ where the companies end up in control (and which then leads potential anti-competitive situations, and/or corporate welfare). There needs to be a middle ground. A balanced assessment.

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  2. AlexInCT says:

    If large corporations actually paid their taxes in the United States

    Here is a simple lesson for you CM: corporations don’t pay taxes. The shareholders and disproportionately the customers that buy their products, do. That’s why there isn’t a fair tax for corporations, because in the end it is everyone that needs to buy from them that ends up footing that bill. People that think fleecing corprosations is a grat thing aren’t even bright enough to realize they are screwing themselves, and doubly so when it is a product they need or use daily.

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  3. CM says:

    Here is a simple lesson for you CM

    Come on now, we’re going to play nice now remember.

    My point was that revenue from those taxes isn’t even being used by anyone in the United States. Consumers and shareholders (and employees) are paying the tax (although I think it’s a little more complicated than that) but that money is simply going overseas. If the system was structured differently so that companies couldn’t register profits in one country and losses in another, then you could have a similar tax take but ease the burden on smaller companies. The larger companies wouldn’t pay more. They’d just pay it back into the United States (where it cames from). Surely the worst of all worlds is where prices/dividends/wages are affected negatively by the need for corporatiosn to pay tax but that tax money doesn’t even flow back into the same system?

    EDIT: Yes, I certainly agree that people who simply believe that corporate tax rates should be higher (and don’t realise what that means) are idiots.

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  4. richtaylor365 says:

    The shareholders and disproportionately the customers that buy their products, do.

    I get what you are inferring here, the problem though is that it negates the impact of taxes on corporations since, technically it does not matter what tax rate they pay since it will be passed on, and that is not correct.

    Hypothetically, Kellog competes with General Mills for the corn flakes market, Kellog resides in a high corporate tax state, GM does not, Kellog can not pass this tax on to the consumer in the form of higher prices, the consumer will just buy GM products instead, so yes, the tax rate does matter for corporations.

    There needs to be a middle ground. A balanced assessment.

    Of course, California at 8.8% corporate tax rate has difficulty competing with Texas, which has a zero tax rate, but this does not bring any corporate revenue into the state coffers, so why do they do it? Partly because there are many other benefits granted to the home state, higher employment (California is at 12% unemployment, Texas is at 8%) means less of a drag on social and welfare dollars spent, a more stable state means higher home prices-more property tax revenue coming in.

    All states are wrestling with this conundrum and must decide what works best for them.

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  5. CM says:

    It certainly is an interesting situation when you not only have the choice of countries to locate in but also fifty states. Companies have a LOT to weigh up, particularly when there are real choices (i.e. the incentives are big enough to go through the hassle and expense of moving).
    Presumably a much lower federal tax rate will provide more opportunities for the states. They’ll have more room to move. Some may take the chance to raise their state corporate tax rate, particularly if it’s low. But wouldn’t you want to wait to see what other states do? Who goes first?!

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  6. AlexInCT says:

    Come on now, we’re going to play nice now remember.

    CM, I wasn’t saying that in any negative manner other than to point out I am surprised people have not grasped this basic concept yet. It’s a fallacy to think corporations pay any taxes, we the consumers do that by pay far more than we needed to for the product.

    My point was that revenue from those taxes isn’t even being used by anyone in the United States.

    And I did not dispute that at all. You are correct about it, but the fact remains that corporations don’t pay taxes, we do.

    Consumers and shareholders (and employees) are paying the tax (although I think it’s a little more complicated than that) but that money is simply going overseas.

    Well if you know of anyone else paying for it, then I am all game to know about it. I think the problem is that people do not like corporations making profits, especially when they feel, for whatever reason, that those profits are obscene or too high. My reply always is the same to that as well: you don’t buy their product at the price you consider too high, and they will sooner or later face the choice between insolvency/bankruptcy or lowering their prices. And don’t get me going on government getting in the game of price fixing. We consumers get hosed on that every dammed time, even when they tell us they are doing it to help.

    If the system was structured differently so that companies couldn’t register profits in one country and losses in another, then you could have a similar tax take but ease the burden on smaller companies.

    Who do you think gave them that system? Here is a hint: It’s not a coincidence that GE is totally beholden to democrats and their agenda and that they avoided all taxes on over $5 billion in profits this year. And what you seem to miss is that these schemes were put in as a two-fer. On the one hand the big corporations avoid taxes, and on the other this government regulation helps to choke small businesses by making their cost of operation high enough that they aren’t going to really be that much more competitive. That’s why big corporations are in ed with government: they can use the politicians to prevent anyone from making them actually have to compete in a fair and open market, for a small fee – well not so mall these days – of course. That’s also why government has no desire to end the practice despite all the talk of evil profit robbing non-tax paying corporations.

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  7. CM says:

    CM, I wasn’t saying that in any negative manner other than to point out I am surprised people have not grasped this basic concept yet. It’s a fallacy to think corporations pay any taxes, we the consumers do that by pay far more than we needed to for the product.

    That’s because it’s not strictly true, as Rich and I have pointed out. Taxes are reflected in a whole lot of different ways, not just via prices.

    I think the problem is that people do not like corporations making profits, especially when they feel, for whatever reason, that those profits are obscene or too high. My reply always is the same to that as well: you don’t buy their product at the price you consider too high, and they will sooner or later face the choice between insolvency/bankruptcy or lowering their prices.

    Sometimes there isn’t much choice in paying more than you’d like.
    But anyway, I agree that some people don’t understand that profits are what keep people employed.

    And don’t get me going on government getting in the game of price fixing.

    Ok, I won’t! ;-)

    Who do you think gave them that system? Here is a hint: It’s not a coincidence that GE is totally beholden to democrats and their agenda and that they avoided all taxes on over $5 billion in profits this year. And what you seem to miss is that these schemes were put in as a two-fer. On the one hand the big corporations avoid taxes, and on the other this government regulation helps to choke small businesses by making their cost of operation high enough that they aren’t going to really be that much more competitive. That’s why big corporations are in ed with government: they can use the politicians to prevent anyone from making them actually have to compete in a fair and open market, for a small fee – well not so mall these days – of course. That’s also why government has no desire to end the practice despite all the talk of evil profit robbing non-tax paying corporations.

    Well if Obama is looking to overhaul the way corporations are taxed to try and avoid losing tax revenue overseas (and by working the system to otherwise avoid tax) then I assume you’ll be on his side on that.

    As for assisting small businesses Politifact rates the Dem claim that “The Obama administration has cut taxes on small businesses 17 times.” as mostly true.

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  8. richtaylor365 says:

    as mostly true.

    Interesting link, and fair. Although many of these can be negated either by past tax increases or those that will kick in later, the general assumption that Obama has lowered taxes on small businesses is accurate.

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  9. CM says:

    Yep, it’s an ever-moving feast. Like with the stimulus and it’s effect on jobs, any analysis depends on what you include or leave out, over what period, etc.

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