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Mike Shedlock

Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. He operates the blog MISH'S Global Economic Trend Analysis and believes in the Austrian School of economics.

Case for Zero Corporate Taxes: Who Really Pays Them?

8 days ago

President Trump and Congress have their eyes on a tax overhaul now that Obamacare replacement has died.

Republicans want to slash corporate taxes. Democrats tend towards arguments like corporations must pay their “fair share”.

Lost in the “fair share” debate is the answer to this key question: Who Ultimately Pays for Corporate Taxes?

Tax overhaul efforts in Washington are being shaped by a debate about whether it is workers or investors who bear the greater burden of U.S. corporate taxes.

If the load falls mainly on investors, cutting corporate taxes will mostly benefit high-income households, in which there is a greater proportion of stockholdings, through dividends and other disbursements. If employees bear the brunt of the burden, corporate-tax cuts could be a path to boosting middle-class incomes by raising wages and employment opportunities, which would support the Trump administration’s promise to tilt tax cuts toward the middle class.

Economists largely agree that workers do shoulder a part of the corporate-tax burden and that permanent cuts could help them, particularly if those changes encourage investment. But agreement largely ends there, with wide-ranging differences of opinion about how the share of the tax burden is divided.

“This is about creating jobs,” Treasury Secretary Steven Mnuchin said on CBS in April, because many surveys show that 70% or more of the tax burden is borne by the American worker. This is about putting money back in the American worker’s pocket.”

Last month, Mr. Mnuchin offered an increased estimate, saying 80% of business taxes are paid by workers.

Although some research supports a 70-30 labor-capital breakdown, many other analyses cut the other way, including work by Treasury Department staff in 2012 and estimates used by the Congressional Budget Office and the Joint Committee on Taxation.

However, no academic model or foreign data perfectly captures what would happen if the U.S. was to change its 35% corporate-tax rate for the first time since 1993.

“There’s a pretty wide band of possible outcomes that are plausible,” said Alan Auerbach, a tax economist at the University of California, Berkeley.

Until a few years ago, the Treasury Department and the JCT assumed the burden of corporate taxes fell entirely on owners of capital.

The nature of a global economy complicates the situation, however, as corporations are taxed differently depending on their location and as capital flows easily across borders. A high corporate tax pushes investment and hiring to foreign economies, punishing domestic workers. By this logic, reducing the corporate tax could help domestic workers by drawing in capital.

That effect is in turn countered by the fact that the world economy isn’t entirely open and there isn’t unlimited investment that would flow into one country if its taxes dropped.

“I don’t think any paper finds that it’s a negligible incidence on workers,” said Aparna Mathur, a resident scholar at the American Enterprise Institute.

The Treasury Department under Mr. Mnuchin pointed to a 2015 study by Céline Azémar and Glenn Hubbard that estimated that a $1 increase in corporate taxes leads to a 60-cent decline in wages, suggesting a tight link between the two, with labor bearing about 60% of the corporate tax burden. The study also says, however, that the effect is muted in larger economies.

Tax Avoidance

My take is the preponderance of the corporate tax burden falls on workers and consumers: On workers when companies offshore and on consumers when corporations raise prices to their desired rate of return.

The issue is complicated as tax avoidance comes into play. For example, GE paid no corporate income tax in a recent 8-year period.

The New York Times article, Profitable Companies, No Taxes: Here’s How They Did It, notes 100 of the top 500 Fortune 500 Companies paid no taxes in at least one year between 2008 and 2015.

Eighteen companies including General Electric, International Paper, Priceline.com and PG&E, incurred a total federal income tax bill of less than zero over the entire eight-year period — meaning they received rebates.

Rally Cry: It’s Not Fair!

With that GE disclosure comes the rally cry, “It’s not fair!”. Indeed it isn’t fair, but not in the implied way.

What is “fair share” other than some undefined, convoluted concoction used to advocate higher taxes across the board on everything?

Corporations that pay no taxes have masses of corporate lawyers, lobbying groups that carve out special deals in congress, and methods that shift profits (and sometimes production) overseas to tax havens.

Corporations waste time and money concocting such schemes. And it drives profits and production overseas. That’s what’s really unfair.

Case for Zero Taxes

Here is the key point: “I don’t think any paper finds that it’s a negligible incidence on workers,” said Aparna Mathur, a resident scholar at the American Enterprise Institute.

We can debate whether the worker percentage is 35% or 80%, but no matter what it is, why not eliminate it?

This would be a win-win situation, no matter what percentages apply.

And if we eliminate corporate taxes, corporations can fire a bunch of unneeded corporate tax lawyers who do little more than concoct elaborate schemes that drive corporate profits and employment overseas.

If we really want to try something different, how about zero percent taxes in the US and some slightly higher rate overseas? That would reverse in one-second flat overseas avoidance. It would also encourage foreign businesses to move part of their operations here!

The only way to eliminate the burden on workers is to eliminate the burden on corporations.

But No! The “fair share” advocates don’t want win-win, they want the workers to get it all. It’s impossible.

Mike “Mish” Shedlock