THE BEAR'S LAIR: A rational system of corporate tax

[unhappycamper]

http://atimes.com/atimes/Global_Economy/GECON-01-261113.html



THE BEAR'S LAIR: A rational system of corporate tax
By Martin Hutchinson
Nov 26, '13

US Senator Max Baucus (D-Montana) has come up with a proposal that corporate cash balances held outside the United States should be subject to a one-off tax at 20%, expected to raise US$400 billion on the $2 trillion of overseas cash, which the good senator can throw around to favored constituencies.

At the other extreme, the US Chamber of Commerce wants to have all non-US income free from US tax, an incentive to outsource everything including the logo for most US corporations. Then there's the question of dividends, still taxed at 35% corporate rate and again at 20% when received by individual shareholders. In other words, US corporate taxation is a mess. So I thought this column would take a crack at designing a rational system.

Chamber of Commerce types want the US to adopt a system whereby it taxes only domestic income, similar to the tax systems employed by most foreign countries. However, that simply encourages companies to "manage" their international tax, inventing fanciful values for their intellectual property and thereby sheltering much of their income in tax havens. It also provides a massive incentive to companies to outsource as much as possible of their operations, leaving only a thin domestic sales operation in the US, since they would pay tax at 35% on domestic activities but close to zero on international activities, once tax haven and licensing possibilities had been maximized.

Even though corporate profits were at record levels of almost 10% of GDP in 2012, corporate tax receipts at $242 billion were far below their 2007 peak of $370 billion and represented only 1.5% of GDP compared to 2.0% of GDP in 1994 and 1.6% of GDP in 2004, both years like 2012 of emergence from recessions. For a different measure, corporate taxes represented only 21% of individual income taxes in 2012 compared to 24% in 2004 and 26% in 1994. Far from being decades of supply-side tax cuts, the last 20 years have seen most of the benefits of any tax reductions go to large multinational corporations, while individual taxes of one sort or another have risen. The vast increase in the number and remuneration of lobbyists in Washington, DC, in the last two decades has produced the inevitable result - a relative decline in the corporate tax burden.