Let's Scrap Corporate Income Tax
The idea for a “repatriation holiday” — a temporary cut in US tax rates — is a very good one: it would bring in much needed revenues from offshore and encourage new investment in the United States.
Placing mandates such as particular job creation goals on the repatriation of earnings is obviously a bad idea if Congress wants the repatriation to maximize revenue, although, if properly designed, such restrictions might do more to reduce unemployment than a laissez-faire tax cut.
Despite its merits, however, the idea of a temporary tax holiday doesn’t go far enough. If the country wants to really get its economy back on track, it should consider something far more radical: the all-out elimination of the corporate income tax.
Corporate income taxes, quite simply, are a very blunt and poorly designed instrument. Although granted the legal fiction of “personhood,” corporations themselves are inanimate entities that can’t actually consume anything or make any decisions. Thus, whenever a corporation gets taxed, the actual payments end up being made by somebody, somewhere.
A corporation with tremendous market power (say, a monopoly utility) might well pass all of a tax increase on to its customers; one in a hugely competitive business (say, retail) might end up simply cutting returns to its shareholders, others might negotiate harder with their vendors or cut services to consumers while charging the same prices.
The single biggest losers when corporate taxes go up, however, appear to be workers: because it is usually far harder to switch jobs than it is to change buying patterns, corporations tend to pass on a large portion of their increases to their own workforces in the form of lower wages. The tendency of corporate taxes to decrease wages, indeed, has moved a number of prominent left-wingers — most prominently former Clinton administration Labor Secretary Robert Reich — into the zero corporate income tax camp.
Reform of the corporate tax code, even if it includes lower overall tax rates, probably isn’t enough to make a major difference. Although the United States has higher statutory tax rates than most of its economic competitors (the highest in the OECD by some measures), the country’s effective tax rates tend to be about in the middle of the G-8 according to Pricewaterhouse Coopers’ monumental /a>“paying taxes"< survey. The difficulty of compliance, PWC finds, is also about average for the world. Changes in the statutory rates and simplification of the tax code could make a difference—Canada’s corporate tax code, the simplest of any large developed country, is a good model here—but it’s not a solution the way outright elimination might be.
True, simply eliminating the corporate tax isn’t a panacea (plenty of poor countries have very low tax rates) but wealthy jurisdictions with good infrastructure that have no or minimal corporate taxes have tended to prosper as repositories for the world’s capital. To date, however, almost all of them — Ireland, Bermuda, and Hong Kong — are small enclaves where a lot of businesses are “brass plate” companies that do few or no actual operations there. If a big country like the United States eliminated the corporate tax, it would quickly become an even bigger repository for all of the world’s wealth.
Not only would companies repatriate earnings once but they would have a huge disincentive to send away any earnings they thought could receive a return in the United States.
Outright elimination of the corporate income tax, of course, wouldn’t be a simple matter: it would require the federal government to find $225 billion in revenue somewhere else. And the debate over where to do it would likely be fodder for nearly endless arguments. But there’s little doubt that the United States would be better off without a corporate income tax.