The Case for Corporate Tax Reform
Earlier today I was trying to say something intelligent about the Obama administration’s corporate tax proposals that wouldn’t require me to obtain detailed knowledge of the Obama administration’s corporate tax proposals. So I said that it seemed to me that the logic of these proposals implied that we should do a bigger, broader reform of the corporate income tax aimed at closing a wide variety of loopholes and deductions in exchange for lowering the headline rate. Ezra Klein points out that the administration has smart guys like Jason Furman working for it so they’re aware of this:
Jason Furman: Marc, you should understand that today’s announcement is a down-payment on the President’s overall tax agenda. As he said in his remarks today, “the steps I am announcing today will help us deal with some of the most egregious examples of what’s wrong with our tax code and will help us strengthen some of these other efforts. It’s a down payment on the larger tax reform we need to make our tax system simpler and fairer and more efficient for individuals and corporations.” That said, the proposals the President made today would start to simplify the tax code. This includes the President’s proposal to reward companies that create jobs in America – which would make the research and development tax credit permanent, adding more predictability and stability to the tax code because companies would no longer have to worry about whether or not the credit would expire or continue.
Specifically on the corporate tax front, during the campaign Senator John McCain (R-AZ) spent a lot of time praising the low corporate tax rates of Ireland. This is a fair but, but the Irish corporate tax code has many fewer available deductions and credits than does the American system, so they wind up raising more money from corporate taxes than we do:
A broad corporate tax reform—perhaps specifically modeled on the Irish system, perhaps not—would be good policy that you could envision achieving bipartisan support. At the moment, the administration is pushing its two big “mandate” items—health care reform and a broad overhaul of energy policy. But if you’re hoping to have an administration that lasts eight years without running out of ideas, I think this is an excellent Year Three or Year Five policy initiative. Ezra points out that “tax reform is an important issue, but it’s never the main crisis, and so no one quite wants to risk political capital on it.” But “never” is a long time. I think there’s actually plenty of time to move on to this issue once the administration sees what it can get on health and energy.
31 Responses to “The Case for Corporate Tax Reform”
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May 5th, 2009 at 1:04 pm
It’s kind of funny how conservatives who reject out of hand the idea that Sweden or Finland could be any kind of model for the United States as far as their banking system, health care, or social policies go, because they’re far too small and homogeneous, can’t get enough of touting Ireland, an even smaller and more homogeneous country, as the very picture of what the United States tax code should be more like.
May 5th, 2009 at 1:08 pm
Interesting that Germany and Switzerland, the two most prosperous economies in the Western world, have the lowest intake of corporate taxes as percentage of GDP.
The German Social Democrats are far better and more intelligent than the American hard-left.
May 5th, 2009 at 1:10 pm
Throw Austria in there too. There is something very appealing about the German temperament when it comes to economic management; sound money, low inflation, anti-populism, low business taxes. American Democrats would do well to learn from the Germans.
May 5th, 2009 at 1:13 pm
The German Social Democrats are far better and more intelligent than the American hard-left.
You say that like it’s an insult. I’m sure none of us would mind having the German Social Democrats (or hell, any of the major centrist parties in Germany or Switzerland) in charge of our government. Though I’d love to hear what people like you would say about us turning socialist then.
May 5th, 2009 at 1:16 pm
Спасибо!
May 5th, 2009 at 1:32 pm
Isn’t the top marginal income tax rate in Germany almost 50%? That would be an interesting sell in the United States.
May 5th, 2009 at 1:47 pm
Myles SG is praising Austria, whose government actually owns a share of many sectors of the economy. Is Myles a socialist?
May 5th, 2009 at 1:47 pm
I don’t know how things are run in Europe, but I do know that there has been a pretty massive movement away from the Corporate structure over the past few decades as more people have formed LLC’s and have elected S corp status. So more business income is taxed at the personal level.
Granted, most of these are small entities, but some of them can get pretty large, like Dreamworks, and many throw off a good chunk of income every year.
May 5th, 2009 at 1:51 pm
more people have formed LLC’s and have elected S corp status.
I suspect this is because there was a bunch of misguided incorporation in the past because it just seemed like a “sensible” thing to do (all those “incorporate in Delaware for $50!” ads in the back of magazines no doubt generated a fair amount of business). Unless you have a lot of shareholders, an LLC or an S Corp is probably the most intelligent choice when forming a separate company, which covers almost all small-to-medium-sized businesses, and even some large ones that have no intention of going public.
May 5th, 2009 at 2:02 pm
And, um…Poland, Turkey, and Hungary.
Oh my God, this parachute is a knapsack!
May 5th, 2009 at 2:09 pm
If conservatives want an Irish tax system, then we should ask for an Irish Health Care System, too.
May 5th, 2009 at 2:14 pm
And, um…Poland, Turkey, and Hungary.
Oh my God, this parachute is a knapsack!
Read: formerly Communist, developing economies, and a formerly autarkic economy. Not a very good comparison to advanced economies.
May 5th, 2009 at 2:16 pm
Fact is, corporate tax take is in German countries. German-language economies also tend to be the most prosperous.
The results cannot be clearer. Lower the American corporate tax take!
We ought to emulate Germany more. At least they have a functioning automative industry.
May 5th, 2009 at 2:30 pm
The perhaps advanced economies shouldn’t ape their economic policies.
Myles, take a logic class. You’re going to hurt yourself.
May 5th, 2009 at 2:59 pm
We ought to emulate Germany more.
I agree wholeheartedly Myles. Oh wait, what’s that, you don’t actually mean what you said? You just want lower corporate taxes and not anything else Germany has like high personal taxes, a robust social safety net, and universal health care?
Wait, let me try it again.
Fact is, they have universal health care in German countries. German-language economies also tend to be the most prosperous.
The results cannot be clearer. Give universal health care to America!
We ought to emulate Germany more. At least they have a functioning automative industry.
May 5th, 2009 at 3:36 pm
suspect this is because there was a bunch of misguided incorporation in the past because it just seemed like a “sensible” thing to do (all those “incorporate in Delaware for $50!” ads
I have had a couple clients who fall for this type of thing, but I think the real reason is that there have been many changes in state law to allow for LLC formations, so partnerships now can get limited liability, where before, it was much more difficult.
May 5th, 2009 at 3:39 pm
What a graph! This graph could be left’s Trojan Horse. I mean, Myles takes one quick look and converts to socialism!
Maddow had a pretty good take on this issue last night.
http://www.msnbc.msn.com/id/26315908/#30568765
May 5th, 2009 at 4:09 pm
MY, would you please embed your charts so they are expandable so as to be readable.
May 5th, 2009 at 4:22 pm
I would actually be more than willing to grant German/Swiss healthcare to America. It is about the only health system in the Western world with a functioning free market. So of course I would be in favour of it.
Of course, that trade wouldn’t be fair unless liberals also agree to, as a quid pro quo, a) German corporate tax intakes, and b) German anti-inflationary monetary policy, a la Bundesbank, with Bundesbank-levels of independence for the Fed and safeguards from populist pressure.
And I believe my position reflects that of most reasonable but principled conservatives.
May 5th, 2009 at 4:24 pm
The perhaps advanced economies shouldn’t ape their economic policies.
It’s not Germany who aped Eastern Europe, it’s Eastern Europe who aped Germany. Western capitalism was an inspiration, based on monetarist principles, for the post-communist economies. Not the other way around.
May 5th, 2009 at 4:53 pm
Fact is, corporate tax take is in German countries. German-language economies also tend to be the most prosperous.
Imagine how rich we’d be if that one vote would have gone the other way!
May 5th, 2009 at 4:57 pm
To to clear things up, the high Norway % is from taking a hefty chunk of oil company profits, no?
Anyone know the reason why the Czech Republic is a couple of standard deviations from the mean?
May 5th, 2009 at 4:59 pm
To to clear things up, the high Norway % is from taking a hefty chunk of oil company profits, no?
or alternatively, taking a modest chunk of hefty profits?
May 5th, 2009 at 6:09 pm
This seems like an obvious observation, but because no one else has said it I’ll chime in: A significant reason that Ireland generates more revenue from its corporate tax than the United States, despite Ireland’s much lower tax rate, is due to the fact that corporations are attracted to Ireland and eager to do business there BECAUSE the tax rates are lower.
May 5th, 2009 at 7:23 pm
If I were to own my own business in Germany, with low corporate taxes and low capital gains taxes, I could make a large fortune when I sold my company, and pay very little taxes on it – would that be a correct assumption?
One would think there would be more entreprenurial activity in Germany.
What am I missing?
May 5th, 2009 at 8:54 pm
The only reason Germany can afford the lower corporate tax haul and the universal health care is their higher (progressive) personal income tax. Throw in the whole package, and there just might be a grand bargain to be made.
The idea of lowering the tax haul from corporations and increasing it on high-income individuals is an interesting one, but I’m not sure I understand all the implications. One benefit it would seem to have is to encourage the top management of companies to plough corporate profits back into the company instead of compensating themselves, which would seem to be a good thing.
May 5th, 2009 at 9:46 pm
Joe,
Think about it this way. Germany has a flat 15% corporate income tax and a 25% capital gains tax. If you start a business in Germany: a gas station, beer distributorship, consulting firm, software company, engineering firm, etc. and you invest your earning back into the business, you are only paying 15% on those earnings. Use that money to expand and in 10 years sell the business and you only pay 25% on those capital gains.
Germany has very high taxes on those who make a lot of money and very low taxes on those who have a lot of money. That tends to make “income inequality” very low but wealth inequality very high.
May 6th, 2009 at 9:09 am
Germany has very high taxes on those who make a lot of money and very low taxes on those who have a lot of money. That tends to make “income inequality” very low but wealth inequality very high.
That’s called encouraging capital accumulation. That’s a good thing.
May 6th, 2009 at 9:14 am
The only reason Germany can afford the lower corporate tax haul and the universal health care is their higher (progressive) personal income tax. Throw in the whole package, and there just might be a grand bargain to be made.
Sure, except I can’t think of a way to contractually guarantee absolute, unrecoverable Fed independence with absolute steady inflation targeting, removal of the “full employment” target, and a hard money policy, a la Bundesbank. Some idiot would just elect a new Congress and puff! it goes. The European Central Bank, for example, is nearly immune from legislative power; it is simply accountable, for the large part, to no one but other central bankers.
It would take a Constitutional Amendment to guarantee this sort of thing.
May 6th, 2009 at 9:18 am
I am one of those people who care more about monetary policy than fiscal policy. Fiscal policy, in the long term, doesn’t matter. Monetary policy is the parameter within which fiscal policy must function.
The whole reason we had the stagflation boondoggle was because of monetary policy capture by political (’full employement’) influence.
May 6th, 2009 at 10:29 am
jmo, combined with other German regulations, it creates a situation that basically favors the ability for people to become small business owners while protecting them from being shoved aside by larger corporate entities. The “whole package” works very well, IMHO. Myles looks at the parts he likes and sees that they serve his authoritarian social goals.