Tax those corporations?

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The Left is excited about this idea. Corporate taxes used to generate a much larger share of taxes, but since the 1980s, corporations pay only about 10% of taxes. To the liberal mind, this is inexcusable. This is what liberals thinks corporations look like.

Greed is GoodFinding and taxing that guy is a notoriously hard problem. But, taxing corporations is not the way to do it. The reason is that people like Gordon Gekko do not own the majority of corporations. When you think of corporations, put this image in your mind instead.

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Most of American corporations is owned by American retirees. Corporations and their profits are the thing that allows people to retire. American retirement plans were valued at $17.5 trillion last year. Some of this is in government bonds and other assets, but the entire value of the US stock market is only $20 trillion. The total wealth of the over 65 crowd in the US is about $33 trillion. Make no mistake, American retirees own this country. And that’s fine by me. They built it.

Now, picture your hard-working grandparents as I propose the following:

1. Don’t tax corporations

2. Tax dividends and capital gains exactly like income

3. Increase tax rates for high incomes

For your grandparents, this means they are taxed on the entirety of their corporate profits as if they were wages. If they get $40,000/year, they’ll pay very little in taxes. If they make $350,000, they’ll be taxed a lot. With a small bump to tax rates for high income, this could be a nicely progressive system.

Compare this with the current system. Today, Apple sells an iPad and makes a profit. The government takes 35%, then Apple disburses some to your grandparents and some to Gordon Gekko. On that dividend, Gekko pays a 15% individual income tax rate, but your Gran gets taxed as if her retirement disbursements were wages. For Gekko, that’s an overall tax rate of about 45% (1-0.65*0.85). But, if your grandparents make, for example, $100,000, they’ll end up paying a further 28% for a total tax rate of 53%. Terrible!

Of course, none of the above considers the reality of transfer pricing. In today’s world, Apple doesn’t pay nearly 35%. Instead, they transfer profits to an Ireland-based subsidiary and pay about 7% overall. Then the strategy is to wait patiently for Republicans to gain control of the Senate, when they’ll announce a “temporary” tax holiday for repatriated capital avoiding taxes altogether (but your Gran still pays her 28%). More about tax avoidance here. It’s time for a better system. Trying to tax the wealthy via corporate tax rates is like playing piano through boxing gloves. We don’t have the precision to tax the right people, and in the process, manage to create a whole lot of havoc in the markets.

So, the next time Bernie Sanders says (with indignation),

In 1952, 32% of all the revenue generated in this country came from large corporations. Today, just 9% of federal revenue comes from corporate America.

take a deep breath, compute how much of your own retirement is invested in “corporate America” and call your Gran.

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