Wednesday, September 3, 2008

Labor Day Discussions

I had a discussion with my brother in law over the weekend about politics and economic policy. He is a Republican through and through (in fact, both of my brother in laws are right-wingers). We talked about tax incentives to send jobs overseas. He told me he had heard that, but didn't really know the facts. I thought I knew the facts, but I was wrong. I looked it up and got the same story from both factcheck.org and The Harvard University Law & Policy Review.

There is a feature in the US tax code that allows US companies to defer taxes on profits generated in overseas subsidiaries. Once that profit is moved back to the United States, it is then taxable. Not surprisingly, the profits are rarely moved back to the US. Harvard estimates approximately $639 billion in profits remained offshore in 2002 - all escaping US tax. Based on a corporate tax rate of 35%, that means that the United States is "out" $223.65 billion dollars in taxes (though after all the deductions and other loopholes, hardly anyone pays the full 35% rate). That sure would have helped our deficit a bit.

Companies invest in facilities (to varying degrees - few have actual manufacturing facilities in Bermuda, for example, but still manage to report huge profits on that no-tax island) in low or no tax countries to avoid US corporate taxes (approximately 35% - in line with other industrial nations - which is why there is no great rush to invest in the UK, France, Germany, Japan...).

However, even if the loophole is closed, there are still strong incentives to build facilities offshore: much less expensive labor and freedom from environmental and OSHA-style laws. So, while companies do get a tax break for moving jobs overseas, that may not be the overriding reason to do so.

My brother in law also stated that we should eliminate corporate taxes, since it is just passed along to consumers and we end up paying it anyway. That was a new one to me. So, I looked up some information. According to the GAO, corporate taxes are only 14% of the federal tax revenues - far lower than I expected.I found reports dated in August 2008 that state: "The Government Accountability Office said 72 percent of all foreign corporations and about 57 percent of U.S. companies doing business in the United States paid no federal income taxes for at least one year between 1998 and 2005.

More than half of foreign companies and about 42 percent of U.S. companies paid no U.S. income taxes for two or more years in that period, the report said."

So, it seems to me that corporate tax is just not that big a burden. The idea that we ultimately pay it seems absurd. First, it's a tax on PROFITS, not revenue. So, perhaps companies build it into the price, but if there are no profits, there are no taxes. And companies go through great accounting machinations to show no taxable profits. So, if it is built into the price of the products we buy, then it's just a guess and at least 72% of the time "we" are not paying their taxes but simply adding to their profits. If anything, corporations should pay their fair share of our tax burden. It strikes me as humorous when the Reagan Republicans cite the 1950s as the glory years of our country and wish we could go back to the values of that time. Well, one of the reasons it was the glory years is because corporations paid far more of their fair share of the federal budget and regular people less! Of course, the Limbaugh crowd doesn't want to talk about that. According to the GAO, the % contribution of overall tax revenues paid by corporations during the 50s was:

1950 - 26.5%
1951 - 27.3%
1952 - 32.1%
1953 - 30.5%
1954 - 30.3%
1955 - 27.3%
1956 - 28%
1957 - 26.5%
1958 - 25.2%
1959 - 21.8%

The percentage stays in the 20s until 1976, when it dropped to 11%. Compare those rates to today's 14%. If anything, I think the loopholes should be closed and US corporations should pay more for the benefits they receive by being incorporated in the United States, which are considerable. One thing we have not seen (and will not see) is a rush to incorporate in the no, or low tax countries. There are substantial benefits to being a US corporation: a stable government willing and able to defend your interests if you are a multinational corporation, a relatively stable legal environment (while they whine about frivolous lawsuits, things are far worse in "banana republics"), an educated and experienced workforce, a world class educational system (especially post high-school)... all things that they should pay their fair share for.

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