Canadian Investment Review

More Corporate Tax Won’t Help

Written by Scot Blythe on Tuesday, November 22nd, 2011 at 7:29 am

506376330The Occupy movements are certainly right to point to growing income inequality, especially against the backdrop of austerity. But, in the last post, it seemed that taxing the 1% was unlikely to yield the kind of money people thought it would.

So what about corporations, whose “greed” has also been highlighted by the Occupy movements? It is unclear what greed could mean. If it means high salaries and bonuses for corporate executives, than that belongs properly to the personal income system. Even so, there is a danger in relying on high incomes, since the level of bonuses and capital gains depends on the state of the economy, as some U.S. states are learning to their regret. The top 1% of the income distribution does not have a stable earnings profile. It’s flush in good times, but ebbs like the Bay of Fundy in bad times.

As the Wall Street Journal notes:

“Nearly half of California’s income taxes before the recession came from the top 1% of earners: households that took in more than $490,000 a year. High earners, it turns out, have especially volatile incomes—their earnings fell by more than twice as much as the rest of the population’s during the recession. When they crashed, they took California’s finances down with them.”

But what about corporations themselves? After all, they are the ones that richly reward some, whether through bonuses, stock options or capital gains. What’s more, they appear to be sitting on vast hoards of cash that they are not spending to create jobs.

There are three issues here. The money corporations are sitting on has already been taxed once. To tax it twice would be akin to taxing everyone’s bank account, just because the money is there. It has been  done before, however.

Secondly, the cash hoard is not a sign of greed, but of economic fear – just as the cash building up in personal bank accounts is. It’s Keynes’s paradox of thrift. In other words, corporations aren’t spending because there’s no profit. Indeed, in the financial sector, one wag recently referred to Bank of America as a non-profit. But even for manufacturing enterprises, there’s little point in expanding production if there is already overcapacity. To put this in graphic terms, at the height of the U.S. auto boom in the mid 2000s, 18 million units were shipped. In the “new normal,” annual sales are hovering around 12 million.

Still, many corporations are profitable, including the once woe-begone automakers (now that their toxic liabilities have been shifted into windup corporations). And the news that GE did not pay U.S. income taxes last year sounds like the height of gall, with $5.1 billion in U.S. profits yet a $3.2 billion tax refund in 2010.

But this – the third point — illustrates the problem handily. A tax rate is one thing. Tax collected is another. Indeed, in Canada progressives like to point out that there’s no need for corporate income tax cuts, since the rates in the U.S. are much higher. But no one pays the posted rate in the U.S.

Higher rates in Canada, in any case, won’t yield much, if anything at all, Laval University economic professor Stephen Gordon thinks: “Profits are a very volatile series and are also highly cyclical, so there’s no reason to expect a tight link between short-term changes in CIT rates and movements in CIT revenues. But if you were making policy based on an assumption that CIT revenues were proportional to CIT tax rates, then you might want to see some sort of downward trend during a thirty-year period in which CIT rates were reduced by half.”

That didn’t happen. In other words, posted corporate income tax rates are poor predictors of revenue yield. More than that, they are not the major source of government revenues, though they certainly help. Since the 1960s, the bulk of federal tax money has come from personal income taxes and sales taxes – 60% or more of the total, while the corporate income tax share has varied wildly, from 18% to 6%. It’s currently 13%.

In Canada, there’s seems to be general acceptance, federally and provincially, about lowering corporate tax rates to around 25%. Interestingly, it looks as if the U.S. is also about to embark on this path.

Writes National Public Radio reporter Adam Davidson:Most people who study the issue agree that the top federal corporate tax rate (35 percent of profits) is simply too high. …While this may seem like Republican propaganda, NPR’s “Planet Money,” for which I work, polled many leading progressive policy groups and academics, all of whom told us that they would support lowering the top corporate tax rate.”

But, he adds, “Even if we eliminated all corporate taxes, the extra $250 billion per year at the companies’ disposal wouldn’t be enough to make our $14 trillion economy grow. President Obama tried an $800 billion stimulus, and we’re still debating whether it helped or hurt or did nothing at all.”

That is the fundamental conundrum. The assumption is that corporations could hire, if tax rates were lower. But they’re not. Corporate taxes are, at best a sideshow.

An illustration: the U.S. taxes world-wide income, one consequence of which is that U.S. corporations keep their overseas earnings overseas, where they have already been taxed once. Many are proposing a tax holiday, so those funds would flow to the U.S. The last time foreign earnings were repatriated, it had little impact on job creation. More to the point, as Reuters notes, a large part of those foreign earnings are parked in U.S. Treasuries – even corporations these days are risk-averse. What happens if they bring that money onshore?

“Not all would be repatriated, and not all is held in Treasuries. But if even three-quarters of the total is invested in United States government debt, that would amount to $1 trillion — more than Japan’s holding of Treasuries, and almost as much as China’s.”

A Treasury sell off whose impact would be greater than a further downgrade of the U.S.’s credit rating? As the adage goes, be careful what you wish for.

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