My last post “Real Tax Reform: Abolish the Corporate Income Tax,” gives six substantial reasons for abolishing the U.S. corporate income tax. As shown in the table below, many American companies are keeping large percentages of their total cash balances overseas in order to avoid paying the very high U.S. corporate tax rate of 35% on these funds.
Sheila Bair, former chair of the Federal Deposit Insurance Corporation from 2006 – 2011, has recently endorsed the same idea in “Why Getting Rid of the Corporate Income Tax Makes Sense”. Ms. Bair’s recent book, “Bull by the Horns,” is one of the best books written about the financial crisis.
Ms. Bair makes many of the same points as in my last post including the suggestion that in return for totally eliminating this tax, both dividends and capital gains should be taxed at the same (higher) rates as for ordinary earned income. She points out that applying ordinary tax rates to realized investment income would make up only about $90 billion of the approximately $300 billion annual cost of eliminating the corporate tax. She suggests that the remaining $210 billion could be raised by implementing Martin Feldstein’s proposal to cap individual tax deductions, excluding for charitable contributions, at 2% of adjusted gross income.
As she says, “We are on an unsustainable path. Caught between eroding corporate revenue on one side and low tax rates for wealthy investors on the other, middle and upper-income wage earners are being squeezed – and there are only so many of us. At some point we might start thinking about moving too.”
Keep in mind the fundamental reason for this proposal: to incentivize U.S. companies to bring their foreign earnings back home for reinvestment and distribution of profits to shareholders (who will then be taxed on this income). This will give our economy the large and permanent boost which it so badly needs to regain its former vigor.
I have been asked to comment on the recent paper, “Reforming Taxation to Promote Growth and Equity,” (http://rooseveltinstitute.org/sites/all/files/Stiglitz_Reforming_Taxation_White_Paper_Roosevelt_Institute.pdf) by the Columbia University economist, Joseph Stiglitz.
I think Mr, Stiglitz’s proposal to raise the corporate tax rate is a poor idea. He goes on to suggest eliminating some loopholes (the ones which distort the economy) but he also suggests creating a new loophole (tax credits for corporations which invest in the U.S.). I think we should set the corporate tax rate as low as possible and offset the revenue loss by closing loopholes, and not creating any new ones.
In fact the best policy would be to eliminate the corporate tax rate altogether and offset part of the revenue loss by taxing both dividends and capital gains at the same individual rate as earned income.
But we also need overall broad-based individual tax reform along the same lines, by lowering tax rates and closing loopholes.
The problem is how to meld these two separate reforms (corporate and individual) into a single, unified whole program which will simultaneously:
1) boost the economy and
2) reduce inequality
I’ll come back to this in a future post.